![]() This is a scenario that policymakers are not yet prepared to consider in their upcoming monetary policy meeting, on August 1. As a result, we now expect a shift in the monetary policy guidance, from neutral to hawkish, as early as September. In particular, a USD/BRL above 4, coupled with additional rises in inflation expectations, would place the central bank’s 2019 inflation forecasts materially above the 4.25% target for that year in all scenarios that consider this more depreciated level for the BRL. If we are right in our FX assessment, the inflation outlook is also bound to suffer, with material upside risk for inflation expectations and for the central bank’s inflation forecasts. As the recent underperformance of the BRL suggests, the heavy intervention in June (totalling US$37bn) served mostly to delay the currency’s adjustmentĪ hawkish monetary policy shift is likely in September ![]() But, in our view, intervention does not eliminate the downside risks to the BRL. And so long as prospects for electing a market-friendly candidate in the October Presidential election remain dim, we consider the equilibrium level for the USD/BRL to be closer to 4-4.2, ahead of the October 7 race.īrazilian officials continue to vow to fight any “excessive” depreciation in the real with FX intervention. As such, we expect the BRL to preserve a weakening bias amid prospects for continued demand for FX hedge. But we remain bearish about the BRL, and still, consider the currency to be among the most vulnerable emerging market currencies.Īs we discussed in Brazil: Buying time with intervention, a weaker BRL is fully justified by Brazil’s precarious fiscal accounts and the challenges any new administration would face reversing its explosive debt trajectory. The recent stability in the dollar helped stabilise the real and allowed the central bank to temporarily halt its ad-hoc FX intervention program, after record-levels of intervention seen in June. It was a catalyst for higher risk aversion, with long-lasting consequences than initially thought, amid rising fiscal and political concerns, tighter credit conditions and greater caution on the part of borrowers and lenders. Overall, this suggests that the truckers’ strike was a catalyst for a more persistent deterioration in Brazil’s macro outlook, beyond its immediate impact on prices and activity. And relief is unlikely in the nearer term, given the high oil prices, FX weakness and the typical seasonality for electricity prices. Regulated prices have also surged, now tracking 12% year on year in June, in large part due to the sharp rise in fuel, cooking gas and electricity prices. ![]() This reflects our less constructive FX outlook, among other concerns such as: 1) the increase in transportation costs triggered by the decision to set a minimum price for truck freight, 2) the larger increase in the minimum wage, which is set to rise 4.6% in January 2019 vs 1.8% in January 2018, and 3) the consolidation of a higher range for inflation, up from a 2.8% YoY average in the past 12 months to 4.7% over the next 12 months, which threatens the favourable inertial impact seen so far this year and risk further deterioration in expectations. Consensus estimates for inflation in 2018 (4.15%) and 2019 (4.10%), as seen in the chart, remain materially lower than our forecast of 4.5% for both years. Our GDP growth forecasts (1.5% in 2018 and 2.5% in 2019) are fairly aligned with consensus, but we suspect there’s more deterioration to come on the inflation front.
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