Brazil: 8% Selic rate for end-2019 is too much too soon - Rabobank

Analysts at Rabobank see the normalization of the Brazil’s monetary policy stance – i.e. hikes towards a neutral level (assumed at 8.0%) – only in 2020, whereas consensus predicts the completion of a tightening cycle (to the same level of 8.00%) until the end of 2019.

Key Quotes

“We recognize the natural uncertainty in (and the room for important discussions about) the estimates of key unobservable (and hard-to-estimate) macroeconomic variables such as neutral rates, natural unemployment, potential GDP. Yet we believe the evidence at hand (e.g. preliminary estimates, inflation dynamics) are consistent with a much below-potential activity.”

“The gradual economic recovery that we envision ahead points to the erosion of existing slacks only late in 2020, making 2019 too soon for a full removal of stimuli. Only time will tell, and for now the BCB will probably take an appropriately cautious approach about these slacks.”

“Importantly, our scenario assumes an increasing fiscal drag ahead (in both budgetary and off-budget policies), as well as the passing of key fiscal reforms (e.g. social security) in 2019. That might also contribute to ease demand-led price pressures and favour lower real neutral rates.”