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The baseline scenario continues to count the Brazil Central Bank key rate (Selic) on hold at the historical low of 6.5% for considerabletime, if fiscal reforms pass and the Federal Reserve stops risingrates soon, according to analysts at Rabobank.

Key Quotes:

“In the minutes of last week’s Copom policy meeting, we saw the committee even more emphatic on the scraping of the forward guidance, amid a scenario of high uncertainty.”

“The BCB continues to stress on the will to fight only secondary effects on the inflation outlook caused by the recent shocks, still seen by the authority as relative price changes. In the end, the Copom reaffirmed “the importance of insisting on communicating that there is no mechanical relationship between recent shocks and (“¦) monetary policy.”

“We believe that, with recent communications, the BCB seeks to buy more flexibility for itself amid rising uncertainties both at external and domestic levels. These uncertainties justify the scrapping of the forward guidance, meaning that the BCB can no longer commit to keeping rates on hold, so that a massive deterioration in baseline scenario and balance of risks could trigger an eventual move (in an alternative scenario).”

“While refraining to provide a flight plan, the current conditions and outlook still seem consistent with stable interest rate. That will continue to be the case for as long as inflation (especially expectations) remain on track to achieve the target for relevant policy horizons. Our baseline scenario continues to count on Selic rate on hold at the historical low of 6.5% for considerable time (i.e. late 2019-early 2020, if fiscal reforms pass and gradual Fed hikes end sometime soon). That is valid only if the current shocks do not aggravate or propagate.”