Thought January 20, 2021 / 10:51 pm UTC

Brazilian Central Bank Turns Hawkish Amid Mounting Inflationary Risks

By Priscila Robledo

As everyone expected, the Central Bank of Brazil’s (BCB) Monetary policy committee (COPOM) maintained the policy rate unchanged at 2.00%. The communiqué was considerably more hawkish than the previous one, which will probably increase bets for rate hikes as soon as in March. 

Figure 1: Inflation Keeps Increasing Rapidly (%, y/y)

Source: Datastream, Continuum Economics. Note: the core average is the average of seven different measures.

The BCB’s inflation assessment was more hawkish. Firstly, the COPOM believes the recent increase in commodity prices will pressure inflation in the short term. The board still believes the ongoing spike in inflation is temporary, but it recognizes that the spike will be more persistent than previously thought. Secondly, the COPOM now believes the diverse measures of core inflation are above the interval that is consistent with the inflation target—in December the Bank still believed core inflation was in line with reaching the inflation target. Finally, the COPOM now projects that the policy rate trajectory expected by the market consensus (i.e. 3.25% for 2021 and 4.75% for 2022) would lead inflation to 3.6% in 2021 and 3.4% in 2022, still below the 3.75% and 3.5% targets for 2021 and 2022, but much closer than the Bank’s estimates of a month and a half ago. 

As usual, the Bank highlighted that lack of progress with reforms and permanent deviations of the fiscal trajectory would increase the neutral policy rate. 

As we expected, the Bank removed the forward guidance, which stated the BCB had no intention to increase the policy rate in the policy horizon. The Bank made clear again that the removal of the forward guidance does not mechanically imply rate hikes. While our baseline scenario still does not consider rate hikes until Q2, we would not rule out a rate hike as soon as in March, especially if the pace of increase of the core inflation measures does not ease or if the risks of an extension of the emergency aid become more acute. 

4Cast Ltd. and all of its affiliates (Continuum Economics) do not conduct “investment research” as defined in the FCA Conduct of Business Sourcebook (COBS) section 12 nor do they provide “advice about securities” as defined in the Regulation of Investment Advisors by the U.S. SEC. Continuum Economics is not regulated by the SEC or by the FCA or by any other regulatory body. This research report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nonetheless, Continuum Economics has an internal policy that prohibits “front-running” and that is designed to minimize the risk of receiving or misusing confidential or potentially material non-public information. The views and conclusions expressed here may be changed without notice. Continuum Economics, its partners and employees make no representation about the completeness or accuracy of the data, calculations, information or opinions contained in this report. This report may not be copied, redistributed or reproduced in part or whole without Continuum Economics’s express permission. Information contained in this report or relied upon in its construction may previously have been disclosed under a consulting agreement with one or more clients. The prices of securities referred to in the report may rise or fall and past performance and forecasts should not be treated as a reliable indicator of future performance or results. This report is not directed to you if Continuum Economics is barred from doing so in your jurisdiction. Nor is it an offer or solicitation to buy or sell securities or to enter into any investment transaction or use any investment service.
Analyst Certification
I, Priscila Robledo, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.