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The Central Bank of Brazil (BCB) signaled potential forward guidance removal but no shift in rate stimulus as anticipated by the market and economist expectations, economists at TD Securities apprise. 

The USD/BRL has stabilized around 5.17 after bouncing from the 5.09 area on Wednesday.

Key quotes

“The BCB held rates at 2.00% as was widely expected in a unanimous decision.”

“The discussion surrounding forward guidance has changed, with a hint that as inflation expectations converge towards target, the conditions for forward guidance may no longer hold. The BCB stressed that this does not mechanically imply higher rates as ‘economic conditions still prescribe an extraordinarily strong monetary stimulus’.”

“We take this to signal an imminent removal of forward guidance in 2021, and an increased emphasis on inflation dynamics and expectations for 2022. We do not change our call for interest rate increases until late Q3, and believe that if the BCB is forced to act earlier, it will likely be due to FX instability resulting from fiscal slippage, and the market questioning the government’s adherence to Brazil’s fiscal anchor.”