Brazil rates – The price of restoring credibility

The BCB has yet to soften its hawkish stance and continues to reiterate the need for vigilance in anchoring inflation expectations. Inflation this year will likely remain substantially elevated versus the BCB's 6.5% target ceiling, boosted by adjustments to administered prices. But inflation expectations have been forced down, with 12-month expectations falling to nearly one-year lows of 6%. With the BCB underscoring its intent to bring inflation down to 4.5% by end-2016, we suspect the BCB is not quite done yet. Key words such as "vigilance" and "perseverance" remain staples in recent BCB commentary, which we interpret as a signal that policy rates have yet to peak. 

The 3 June COPOM meeting may bring a 50bps SELIC hike, followed by another hike at the 29 July COPOM meeting, and this cycle's peak is approaching following June and July's expected tightening, expects Standard Chartered. Real policy rates are nearing 6% in Brazil, close to the peaks in previous hiking cycles, and the impact on the economy is becoming increasingly evident. Moreover, inflation is beginning to stabilise in Q2 and inflation expectations are trending lower (if slowly). This could provide a viable backdrop for the BCB to pause and assess the impact of both monetary and fiscal adjustments so far this year.

Curiously, the BCB has never left policy rates unchanged for more than six policy meetings, going back to 2002. Moreover, the BCB seldom leaves policy rates unchanged for more than four meetings after a tightening cycle, typically starting an easing cycle shortly afterward. On the condition that inflation and inflation expectations remain well-behaved (particularly the latter), the BCB will starts to cut policy rates in early 2016, taking the SELIC rate back to 11.75% by year-end 2016, says Standard Chartered.