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Brazil: No fireworks, BCB to maintain status quo - TDS

FXStreet (Delhi) – Prashant Newnaha, Rates Strategist at TD Securities, suggests that the highlight of today’s session will be the BCB’s rate decision, with both TD and the unanimous consensus expecting the Selic rate to remain unchanged at 14.25%.

Key Quotes

“The market is also sceptical about the possibility of a rate change and prices in less than a 15% chance of a hike. However, future policy decisions are much less predictable, with the market expecting a substantial extension of tightening (up +180bp by end-2016), while analysts forecast a 150bp reduction to 12.75%.”

“Indeed, with lingering political uncertainty and its detrimental effects on BRL—hence on CPI— while fiscal consolidation is just not happening yet, the BCB may want to revise some of its working assumptions.”

“This could mean either 1) an extension of the time required for inflation convergence to 2017 instead of 2016, which would suggest rates to stay where they are until a delayed resumption of easing into end-2016 at the earliest, or 2) the reiteration of an increasingly unrealistic narrative on inflation convergence, which could suggest further upside adjustments in rates to make convergence attainable by end-2016.”

“In both cases, the BCB may consider amending its statement—the most interesting part of the story today— before providing better guidance with the minutes on 29 October.”

“In this context, the IPCA-15 inflation release will be much less interesting than usual, although it will provide a preview into the possible revision of the BCB’s inflation targets. Consensus looks for +0.68% M/M (NSA) or 9.8% Y/Y in September, higher from the 9.6% Y/Y recorded in the prior month.”

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