When a Risk Becomes (Almost) Certainty
In the statement following its last meeting, the COPOM changed its forward guidance, conditional on confirmation of its baseline scenario, to only one more cut of 50 basis points at the meeting in May, without any indications regarding subsequent meetings. Back then, in the minutes of that meeting, the Committee indicated that the change in the communiqué was required for greater flexibility in conducting monetary policy given the increase in uncertainty in both domestic and international environments.
Since that meeting, some risks of higher inflation have materialized, which should lead to changes in the baseline scenario at the next meeting, while remaining uncertainties have intensified. On the external front, the numbers from the United States have confirmed the persistence of inflation, with acceleration of the CPI and its underlying measures, as well as stronger economic activity and job market data. With this, the yields on American bonds have risen and the dollar has appreciated more (a pattern observed since the start of the year).
In Brazil, besides the ensuing external pressure, the Real suffered additional weakening with the presentation last week of the project for the Budget Directives Law (LDO), which has reduced the primary surplus targets starting in 2025 and indicated an unsustainable spending dynamic, deteriorating the perception of Brazil’s fiscal policy and increasing the risk premiums. The pressure on the currency led the exchange rate, which was R$ 4.95/US$ in the Central Bank’s baseline scenario, to an average of R$ 5.23/US$ last week. In the domestic setting, the data on activity disclosed in recent weeks prompted us to raise our forecast for GDP growth in the first quarter to 1.1% (from 0.8% previously) and for the entire year to 2.3% (from 1.8%). Inflation, despite an overall benign reading in March, remains high in the service sector, with additional pressure from higher wages, while new upward risks were incorporated with the depreciation of the exchange rate.
In this context of deteriorating external and domestic scenarios, together with increased uncertainty, we expect the Central Bank to reduce the pace of the cuts in the SELIC rate to 25 basis points at the COPOM meeting in May. Besides this, we have also changed our projection of the rate at the end of 2024 from 9.25% to 10%.
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