Emerging Markets | LATAM | Monetary Policy & Inflation
Summary
• The Central Bank of Brazil started tightening before many others in March 2021, subject to much analyst criticism.
• Now, with the SELIC at 9.25%, most expect at least 150 bps more in tightening, because headline inflation is above 10% YoY.
• However, I argue that they may already have tightened more than necessary with the ex-ante real SELIC above 3%, services and nontradable goods inflation of around 5.5% YoY and all indexes showing clear signs of peaking.
Market Implications
• The DI curve has come in significantly since November 2021 but remains flat of the rise and steepening seen since July 2021.
• We expect an inversion of the curve if the BCB follows up on its signalled 150 bp SELIC rise for February.
• Consequently, we also expect the BCB to revise this view.
Summary
• The Central Bank of Brazil started tightening before many others in March 2021, subject to much analyst criticism.
• Now, with the SELIC at 9.25%, most expect at least 150 bps more in tightening, because headline inflation is above 10% YoY.
• However, I argue that they may already have tightened more than necessary with the ex-ante real SELIC above 3%, services and nontradable goods inflation of around 5.5% YoY and all indexes showing clear signs of peaking.
Market Implications
• The DI curve has come in significantly since November 2021 but remains flat of the rise and steepening seen since July 2021.
• We expect an inversion of the curve if the BCB follows up on its signalled 150 bp SELIC rise for February.
• Consequently, we also expect the BCB to revise this view.
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