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, Stewart Oldfield
Ste anian
, "Arian Dwyer"
, Vahe
Richard Kahn
Classification: Confidential
Original Message
COPOM minutes maintain hawkish tone, signaling further tightening:
The BCB published the COPOM minutes explaining last week's decision to raise the SELIC rate by 50bps to
13.75%. There were very few changes in the document, suggesting that the tightening cycle will continue. We
now expect another 50bp rate hike for the next meeting in July. We expect this to be the final increase in rates,
although the risk seems tilted toward additional hikes.
There was a meaningful change on paragraph 28, toward a more hawkish tone. The BCB repeated that two main
changes in relative prices (FX depreciation and increase in administered prices) are affecting inflation in the
short-run and keeping it high in 2015, but added that this will require "determination and perseverance to prevent
its transmission to longer periods." The choice or words could indicate not only that there is more tightening to
be done, but also that once the cycle has ended, it could take a relatively long time for the BCB to cut rates again.
Regarding the official inflation forecasts, assuming an exchange rate of BRL3.15/USD, SELIC rate of 13.25%,
and increase in administered prices of 12.7% in 2015 (up from 11.8%) and 5.3% for 2016 (vs. 5.2%), the passive
IPCA forecasts increased and remained above the 4.5% target for 2015, and remained unchanged and above the
target for 2016.
The BCB is due to publish its revised forecasts in detail in its quarterly Inflation Report at the end of June.
Assuming a SELIC rate of 12.75%, exchange rate at BRL3.15/USD and GDP contraction of 0.5% this year, the
Inflation Report published at the end of March forecast inflation of 4.9% for 2016. We believe the BCB's passive
inflation forecast will be lower in the June report, given that the SELIC rate has climbed to 13.75%, the GDP
outlook looks much worse, and the currency is roughly at the same level. However, the fact that the COPOM
minutes reported no reduction in the 2016 IPCA forecast (assuming a SELIC rate of 13.25%, i.e. before the
decision to raise it by another 50bps) suggests to us that the Inflation Report's forecast for 2016 will not reach
4.5% yet (even though it could show a number closer to 4.5% for 2Q17).
Thus, although we still expect the BCB to base its monetary policy decisions mainly on its own inflation forecast
than on the market's forecast for 2016 (which was still at 5.5% last week, according to the Focus survey), we
now believe the BCB is not done hiking rates yet. Since there was no indication of a reduction in the pace of
hikes in the minutes, we believe another 50bp increase in July is more likely than a 25bp hike. We believe the
extra 50bps will probably be enough to make the BCB's inflation forecast converge to 4.5% in 2016, although
the authorities will likely keep the door open for additional tightening, contingent on the upcoming data.
The BCB unexpectedly reduced the rollover of FX swaps again On Wednesday night, the BCB announced that it
would offer today 6,300 contracts to roll over the USD8.7bn in FX swaps due on July 1. Until now, the BCB was
offering 7,000 contracts per day, a pace that would have led to a rollover of 80% of the next maturity. By
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maintaining the lower pace announced on Wednesday until the end of the month, the BCB would roll over
approximately 75% of the maturity. Thus, the BCB continues to signal that it is comfortable with a weaker BRL
(which stimulates net exports and helps reduce the current account deficit), taking advantage of appreciating
movements to reduce the supply of FX swaps (which are currently at approximately USDI 1 1 bn), and using
interest rates to curb inflation.
IGP-M higher than expected
The first June preview of the IGP-M inflation index came in at 0.47%, slightly down from 0.51% in the first May
preview but higher than our forecast of 0.30%. Wholesale prices (60% of the index) rose 0.35%, compared to
0.56% in the first May preview, as agricultural prices fell 0.45% (vs. -1.52), led by lower prices of soybeans and
corn, and industrial prices decelerated less than expected to 0.65% from 1.37%, as iron ore prices rose 4.9%.
Consumer prices (30% of the index) accelerated to 0.60% from 0.47%, led by food (0.66% vs. 0.10%) and
assorted expenses (5.24% vs. 0.42%), mainly reflecting the hike in lottery tickets. Construction costs (10% of the
index) also advanced to 0.90% from 0.27%, led by labor costs. We expect the IGP-M to rise approximately
0.50% in June.
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