On Wednesday, the Central Bank of Brazil will announce its decision on monetary policy. Analysts at TDS, expect the BCB to keep rates unchanged and they see little BRL risk in the meeting, as the market has moved much more dovish on the policy path, and the chance of the BCB coming in more dovish is low.
“We expect the BCB to remain on hold at the December meeting, but in light of recent inflation data developments, we now consider there to be a substantial risk to our call for a February start to the hiking. We however will wait to see the shift (that we expect) in the policy statement, before deciding where to push out our expected start to the hiking cycle.”
“The greater emphasis on domestic growth and the still very repressed inflation expectation picture will be as key as the BCB’s commentary on the impact of the less supportive external environment on BRL.”
“We expect very little reaction from FX as a result of the COPOM decision, given that the market already has a fairly dovish view priced in to the rates curve (that we don’t disagree with at this point). We continue to expect BRL to take its tone from broad USD moves, and domestic growth dynamics.
“With the market having moved rates pricing since December for the start of the hiking cycle out by one to two months, with a full hike not priced until at least mid-2019, we think that the BCB would have to be extremely dovish to have a substantial market impact. This would likely be expressed through a bull-flattening in the curve.”