BCB: Cutting 100bps now and less later, as uncertainties restrain future moves – Rabobank

Mauricio Oreng, Senior Brazil Strategist at Rabobank, notes that the Copom has cut the benchmark Selic rate by 100bps to 10.25% p.a., in line with a vast majority of analysts (us included) and the yield-curve pricing.

Key Quotes

“In the statement, the BCB highlights the effects of higher uncertainties regarding the evolution of reforms, both on the economy and the easing cycle. These uncertainties might potentially hit the activity recovery, add to inflation risks, blur the forecasting capacity, and hinder the decline in (structural/actual) interest rates.”

“The committee has also signalled a likely softening in the speed of cuts to 75bps in the next meeting. The flight plan looks consistent with yearend Selic between 8.5—9.0%. Yet the BCB is buying flexibility, hinting at possible reassessment of the cycle’s extension.”

“Amid fluid political conditions (i.e., positive and negative developments for the pension reform on the cards), we judge as perfectly adequate this approach of sticking to a baseline macro scenario and highlighting the effects of the higher uncertainty. For now, the latter is admittedly limiting the room for more aggressive rate cuts by the BCB.”

“We keep our end-2017 Selic projection at 8.5% and continue to watch political developments, especially those affecting the outlook for the pension reform. Contrary to downside we used to see to our long-held Selic forecast, the risks now look more upwardly skewed.”