Notwithstanding the above baseline scenario and the recent improvement in inflation expectations, the BRL continues to face challenges over the medium term as the macro outlook is considerably weak and the fiscal trajectory uncertain. The possibility of fresh and substantial pressure on BRL constitutes the key upside risk to our medium-term inflation outlook and, hence, the peak Selic rate forecast at 13.75%.
Further, a sufficient enough moderation in inflation later next year could prompt the BCB to implement limited monetary easing. However, given the above-mentioned pressure on the BRL, the uncertainty over the inflation outlook and the likely course of the Federal Reserve's policy tightening, the extent of any monetary easing - if at all - will likely fall short of consensus expectations. At this stage, discussion regarding monetary easing seems farfetched.
"We and the consensus expect the BCB to deliver yet another 50bp rate hike at its June Copom meeting, in what is turning out to be a long and seemingly inconclusive battle against inflation while the economy is in recession and has grown below trend for the last four years. With the output gap estimated to reach 3.4% of potential GDP this year (above 4% next year), accelerated labour market weakening and inflation expected to subside next year (although largely on the base effect), we expect the BCB to conclude its rate tightening in June. We would look for some hint to this effect in the short statement that comes with the rate decision." says Societe Generale
