Sao Paulo – If the forecast for the next meeting of Monetary Policy Committee (Copom) was already accelerating the rate of increase in Selic, to between 1.25 and 1.5 percentage points, amid the scenario of fiscal deterioration while evading the spending cap announced by the government last week, a more telling possibility. The rally gained strength this Tuesday (26).
This is because it was issued this morning, Tuesday, the eve of the Central Bank meeting National Broad Consumer Price Index 15 (IPCA-15) October, which rose 1.20% in October compared to September, the largest change for the month since 1995 (1.34%), and the largest monthly change since February 2016 (1.42%). The number was more than expected, as the Refinitiv consensus expected a rise of 0.97% on a monthly basis.
According to Tatiana Nogueira, an economist at XP, the IPCA-15 is showing pressures on inflation due to ongoing transfers of higher production costs and the effect of accelerating service prices.
As a result, the IPCA’s house forecast for October, which was 0.77%, moved to an increase of 1.06%. Forecasts for 2021 increased from 9.1% to 9.5%. In 2022, the forecast remained at 5.2%.
Items such as rent, airline tickets, accommodation, and hairdressing, among others, saw price increases much higher than expected.
Last week, it is worth noting that XP revised its expectations for higher interest rates, We now expect a 1.5 percentage point increase at Copom’s meetings tomorrow and December, from 1 point earlier. This brings the interest to the end of 2021 at 9.25%. For 2022, the home estimates two price hikes, of 1 point and 0.75 point, and a selec rate of 11% at the end of the cycle and at the end of next year.
Also last week, Barclays raised its forecast for an interest rate increase from 1 percentage point to 1.5 percentage points, and raised its final interest rate estimate from 9.25% to 9.75%.
“In Brazil, increased fiscal policy uncertainty in 2022 due to proposed spending cap changes is likely to exacerbate Cobum’s assessment of upward risks to inflation at Wednesday’s meeting,” Barclays analysts Roberto Sisimsky, Alejandro Ariza, Pilar Tavilla and Nestor Rodriguez wrote.
After the IPCA-15, the institution also highlighted that it sees “upside risks” in its forecast for an interest rate hike next Wednesday.
Goldman Sachs, in a report back on Tuesday, noted that with the October IPCA-15, with core and services inflation significantly higher than expected, in addition to a more deteriorating overall scenario and the riyal falling, it expects Copom to accelerate the rate of increase in rates to At least 1.5 percentage points, to 7.75% per annum.
However, in addition to this, he estimates a 20% chance of a greater rise in Cilic at tomorrow’s meeting, between 1.75 and 2 percentage points.
In the scenario of deteriorating inflation expectations, while the base case of the bank rose by 1.5 points, it assesses some possibility that BC may present a “tough” surprise [mais dura] For the market to better anchor expectations and thus raise interest rates by 1.75 points (maybe up to 2 points) to 8%, which indicates the possibility of another hike of the same size at the December meeting (to 9.75%).
“In our assessment, the risk-reward ratio between growth and inflation with a rise of 1.75 points is not unfavorable and may ultimately reduce the need for a more robust response in 2022, particularly if Selic’s projected trajectory begins to target a forecast of sub-target inflation in 2023 Alberto Ramos, head of Latin America economic research at Goldman Sachs.
For Gustavo Cruz, chief strategist at RB Investimentos, the IPCA-15 puts more pressure on the central bank, as it is hard to believe that the monetary authority would be well-connected enough to achieve a rally of less than 1.5 points without putting pressure on it. to the market.
According to him, the market was already expecting the IPCA engine to be transportation, fuel and electric. However, the airline industry’s participation in the index’s rise, with ticket prices rising on average by 30%, came as a surprise.
Core averages rose 0.82% month over month and Core Services rose 0.66%, both well above expectations.
Inflation pressures are unlikely to subside quickly and further strong increases are likely in the coming months. This surprise in the inflation preview should also put pressure on Copom to raise Selic by 1.5 percentage points,” reinforces Rio Bravo.
Daycoval Asset also expects a 1.5 point increase in Selic’s rate at the next Copom meeting and a year-end rate of 9.25%.
Itash also sees a 7.75% increase in interest rates, noting that the recent increase in the domestic risk premium could cause a further deterioration in inflation expectations, putting the damage under control, implying a timely adjustment of monetary policy.
“We hope in its letter that the committee will signal another increase of the same size for the next meeting in December, and reinforce the alert about the need to reduce uncertainty about the financial outlook, which has already been cited as a source of inconsistency in the balance of inflation risks,” the economists estimated.
For the bank, the authorities must also repeat the message that the exchange rate will rise to the level necessary to achieve
Inflation to target on the appropriate horizon for monetary policy, with a greater focus on 2022. Given the context of change in the financial system, this means, in the view of analysts, a flat rate of 11.25% at the end of the monetary policy tightening cycle in March 2022.
Credit Suisse changed its forecast and if, last week, He started predicting a 1.25 point increase in Cilic Amid the financial downturn, a 1.5 point advance is now also expected at this Wednesday’s meeting.
“At that point, we argued that without a strong and credible government commitment to the 2022 spending cap, risk aversion could continue to fester and British Columbia might need to raise interest rates by more than 1.25 points to stop the deterioration of inflation expectations. Limit the acceleration of tightening.In our opinion, higher neutral rates resulting from weak fiscal framework and worsening inflation risk balance will make BC increase Selic faster and to
Final interest rate hike to curb the increase in inflation expectations,” Swiss bank economists point out.
In upcoming meetings, BC is also expected to raise interest rates by 1.5 points in December, 1 point in February 2022, 0.75 points in March and 0.5 points in May next year. In doing so, Selic’s rate will increase to 9.25% at the end of 2021 and to 11.5% at the end of 2022.
Inflation forecasts have also been revised. With a surprise IPCA-15 and The amendment was announced on Monday For fuel prices, we are revising our IPCA forecast from 9.1% to 9.8% for 2021. For 2022, we are revising our forecast from 5.5% to 5.8% due to the expected higher impact of inflationary inertia,” they note.
Citi is also seeing a 1.5 point rise at this meeting and expects BC to announce another hike of the same size at its December monetary policy meeting, with the Selic rate expected to reach 11% annually at the end of the current tightening cycle. , Next year.
The bank noted that “inflationary pressures remain rampant, and have become more widespread and persistent than previously thought.”
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