Brasilien

[bonded]

Brazil Economics View

Paving the Way for a Longer Monetary Easing Cycle?

·         A certain stabilization to the global environment since the latest Copom meeting has supported a slight BRL appreciation, driving the USDBRL to around 4.0.

·         Downward revisions of inflation and interest rates expectations have been the main changes in the domestic outlook since September, while the activity outlook has just slightly changed.

·         Copom’s inflation forecasts should drop further, positioning even lower than the target midpoint, ratifying the view of more cutting room and potentially signaling Selic rate levels lower than 4.5%.

·         The balance of risks has also improved, with the conclusion of the Pension Reform bill and the better global environment allowing Copom to turn more dovish in tomorrow’s decision.

·         Communication will be critical to assess the extension of the easing cycle. We maintain our view that Copom will cut the Selic rate until 4.5% but recognize that an alternative scenario of longer cuts keeps strengthening.

 

Brazil Economics View

Domestic Momentum versus Global Slowdown

·         As CPI inflation surprises to the downside (demand softness) and inertia lowers, we have cut our year-end forecasts (to 3.1% in 2019 and 3.8% in 2020). This adds downside risks to our base-case scenario whereby the Copom cuts the Selic by 50bps in October and in December.

·         The stabilization of commodity prices reinforces our expectation that the USDBRL will likely be 4.00 by year-end, even with BoP’s revised stats.

·         The gradual economic recovery under way masks both positive growth drivers, based on domestic demand, and negative growth risks, mainly from overseas. We therefore keep our GDP growth forecasts intact (2019: 0.7%; 2020: 1.8%).

·         Finally, in October, the Congress concluded approval of the Pension Reform, opening room in Congress to discuss other major reforms, such as Tax Reform.