Home Brazil BCB On Copom Day, Goldman Sachs Sees Brazil’s BCB Raising It’s Selic Rate 100bps to 6.25%

On Copom Day, Goldman Sachs Sees Brazil’s BCB Raising It’s Selic Rate 100bps to 6.25%

On Copom Day, Goldman Sachs Sees Brazil’s BCB Raising It’s Selic Rate 100bps to 6.25%
Aerial view of Brasilia and Central Bank of Brazil headquarters building - Brasilia, Distrito Federal, Brazil

NEW YORK — Brazil’s central bank is set to continue raising its benchmark interest rate today as inflation expectations deteriorate and the general outlook for the cost of living in Latin America’s largest economy worsens, according to Goldman Sachs.

High and disseminating inflation pressures, lingering political noise and lack of progress on the reforms, among other factors, “should lead the central bank to continue to normalize monetary policy and reach a restrictive above-neutral stance by end-2021,” analysts Alberto Ramos and Daniel Moreno wrote in a research note to investors dated September 17.

The central bank, known as BCB, announces its monetary decision on September 22 with Goldman Sachs expecting another 100 bps rate hike on the reference rate or Selic. The decision will take the rate to 6.25%, a level moderately below neutral, the analysts said. “Given recent statements from some Copom members that the central bank should not overreact to high frequency data, we assess only a small probability of a larger, market-surprising 125bp hike.”

Since the last Copom meeting on August 4, when the policymakers implemented their fourth interest rate increased of the year and the biggest in almost two decades, upping the rate by 100 basis points to 5.25%, Brazil’s economy has confronted diverging forces. While the Covid backdrop has improved further, with real activity data mixed but with a slightly negative bias, inflation surprised negatively amidst intensifying signals of second-round effects, and the financial conditions have tightened, according to the two analysts.

Source: Goldman Sachs

Increasing Energy Prices

Just last week, the Brazilian government raised its forecast for inflation amid increasing energy prices and a severe drought, Reuters reported. Brazil’s Economy Ministry expects that the cost of living, measured by the IPCA consumer price index, would accelerate by 7.9% this year, from a previously forecast of 5.9%. Prices may still move higher next year, with the IPCA expected at 3.75% versus 3.5% projected before.

The Economy Ministry maintained its forecasts for gross domestic product to expand 5.3% this year and 2.5% next year. Adolfo Sachsida, Brazil’s economic policy secretary, said last Thursday that the country’s upcoming spectrum auction for 5G networks, as well as the privatization of companies like Centrais Eletricas Brasileiras and the national postal service would help attract private investment, according to Reuters.

“Overall, we expect the Copom to harden the language on inflation and the balance of risks around it,” Ramos and Moreno said in the report.

Trading Economics’s global macro models and other analysts expectations concur with Goldman Sachs’ forecast of a 100bps hike. In a report earlier this month, J.P. Morgan analysts also project a similar move followed by 75bps and 50bps increases in the last meetings of the year to end tightening the cycle at 7.5%.

Eyes on the Fed

The day the BCB decides on interest rate, the U.S. Federal Reserve is expected to keep the target range for the federal funds rate steady at 0-0.25 percent at the end of its two-day meeting, according to Trading Economics. Investors will be “eager to hear if the central bank will begin withdrawing stimulus this year as the economy rebounds.”

Fed Chairman Jerome Powell assured markets the central bank would take a measured approach to tapering bond purchases, but several policymakers have been calling for early tapering despite the recent slowdown in inflation numbers.

Also relevant:

As Latin America’s Inflation Rises, J.P. Morgan Sees Mounting Pressure to Raise Rates


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