NEW YORK — When Brazil’s central bank policymakers decide October 27 the fate of the nation’s monetary policy, Goldman Sachs sees one direction: “150 bps hike is now par for the course!.”

Until October 22 the investment bank was expecting a rate increase of 125 basis points in the benchmark rate known as Selic from its current level of 6.25%, but after the recent “very significant macro-financial developments,” Goldman Sachs is boosting its forecast.

The most recent event took place today as Brazil’s 12-month inflation rate rose in the 12 months through mid-October after transportation and power prices continued to increase, Dow Jones Newswires reported earlier. Consumer prices rose 1.20% from Sept. 16 through Oct. 15, the fastest pace for any month in more than 5 years, and increased 10.34% from a year earlier, according to data released today by Brazil’s Institute of Geography and Statistics, IBGE.

“We expect the Copom to accelerate the pace of rate hikes to at least 150bp at the October 27 meeting, driving the Selic policy rate to a slightly above-neutral 7.75%,” said Alberto Ramos, chief Latin America economist at Goldman Sachs, in a report to clients earlier today.

Brazil’s inflation index not only surpassed expectation but came with significantly higher than expected core and services inflation “amidst rapidly rising inflation generalization,” Ramos said. The analyst added that there is even a 20% probability of a larger 175-200bps Selic hike.

An Even Higher Rate Increase

“Against a backdrop of deteriorating inflation expectations, while our modal call is for a 150bp hike, we assess some probability that the central bank could elect to deliver a hawkish market surprise to better anchor expectations and hike 175bp (possibly even 200bp), to a not excessively high 8.00%,” the report said.

If the monetary authority opt to take this much hawkish path it may state the possibility of another hike of the same magnitude at its December meeting, to increase its Selic rate to 9.75%. “In our assessment, the risk-reward and growth-inflation trade-off of an assertive couple of 175bp moved is not unfavorable and could eventually reduce the need for a more aggressive response in 2022, in particular if a more frontloaded Selic path starts to point to below-target projected inflation in 2023,” Ramos wrote in the report.

Goldman considers that Brazil’s inflation is “driven to a large extent by intense inflation pressures on industrial/manufactured goods and a major food/fuel price shock.” At the same time, electric rates in Latin America’s largest economy have been rising for months as a drought has dried up reservoirs behind hydroelectric plants, requiring power companies to make greater use of more expensive fuel-fired plants. The price of electricity rose 3.91% in the month through mid-October, the single biggest contributor to the faster inflation rate, Dow Jones reported.

Also relevant:
* Goldman Sachs, Morgan Stanley See Brazil Accelerating Monetary Hawkishness on Oct. 27 to Curb a Rising Inflation
* BofA Sees BCB Ending Hiking Cycle in December, Raises Brazil Year-End Inflation Forecast to 8%
* Morgan Stanley Warns Brazil Faces Stagflation, Halves 2022 GDP Growth Forecast to 1.2%