NEW YORK — How aggressive Brazil’s central bank needs to be this week to fight a double-digit inflation? If you ask analysts at Goldman Sachs and Morgan Stanley the move on its reference rate should be 125bps, above the consensus, pushing Selic to 7.50%.
“A more forceful near-term monetary policy response is warranted not only because of the deterioration of the inflation outlook for 2022 and the overall balance of risks around it, but also because of the growth and investment damaging effect of lingering financial volatility amidst rising fiscal- and policy-premia,” said Alberto Ramos, chief Latin America economist at Goldman Sachs, in a report to investors.
Brazil’s inflation reached in September its highest level since February 2016, rising to an annual rate of 10.25%. And if the index that measures the cost of living in Latin America’s largest economy entered double-digit territory a month ago, many specific items were already there, Associated Press reported October 8. In the 12 months through September, electricity prices jumped 28.8% and cooking gas 34.7%, while chicken surged 28.8% and red meat 24.8%, the news agency posted on its website.
To limit these pressures Goldman Sachs sees “at least” 125bps increase by BCB’s Copom on its rate decision scheduled for October 27, driving the Selic policy rate to a modestly above-neutral level. “Furthermore, we assess a 33% probability of larger 150bp Selic hike,” Ramos said in the report dated October 22.
The monetary authorities will most likely acknowledge the “growing downside risks to real activity” and recognize the acceleration of inflation, rising core and services inflation pressures, as well as the deterioration of inflation expectations. “Overall, we expect the Copom to harden the language on inflation and the balance of risks around it,” Ramos added in the research note.
Brazil’s headline inflation accelerated in September, driven to a “large extent by intense inflation pressures on industrial/manufactured goods and a major food/fuel price shock,” the analyst said. At the same time, services inflation is picking up and at 4.4% y/y and “is now tracking well above the 3.75% end-2021 target.”
Morgan Stanley’s View
Morgan Stanley also believes the central bank will accelerate the hiking pace to 125bps, despite that policymakers hinted in the previous monetary statement that they would deliver another hike of 100bps.
“Accelerating the pace of hikes to 125bps would acknowledge the rise in fiscal risk and deterioration of financial conditions,” economists Andre Loes , Fernando D. Sedano, Thiago A. Machado and Lucas B. Almeida wrote in a report to clients.
“In a way, if we assume BCB’s approach from the last meeting – do not front load more under the conditions at the time – remains valid, 125bps would be the new 100bps. Hiking 150bps would be front loading, in our view, thus we believe the central bank would not go for that, based on the minutes of the last meeting,” the analysts wrote in a note dated October 22.
On September 22, Brazil’s central bank raised its benchmark lending rate by one percentage point as consumer prices continued to rise rapidly, and said it expected to increase it by the same amount at its next meeting in October 27, Dow Jones Newswire reported. It was the second consecutive increase of that size, following increases of 75 basis points at each of the previous three meetings. The Selic began 2021 at a record low of 2%.
In late September, Morgan Stanley warned Brazil was facing the adverse scenario of stagflation and lowered its GDP growth forecast for 2021 and 2022, according to a research report to investors.
Earlier this month, Bank of America’s economist and fixed income strategist David Beker forecast the BCB will increase its reference rate by another 100bps on the October 27 meeting, “followed by one last hike” of 75bps on December 8, to take the Selic rate to 8.00% by year-end.