Brazil: Rates to roll on a downhill trajectory - BNPP

Analysts at BNP Paribas suggest that as the market consensus on Brazil’s rates steadily drifts their way, they lower their rate call and cut their end-2017 rate forecast by 50bp to 7.5% and expect a 100bp cut on 26 July. In addition, they reaffirm their below-consensus terminal rate call of 7.0% for next year.

Key Quotes

“Interest rates in Brazil would drop much lower than people expected. As it turns out, the market consensus on rates has repeatedly drifted our way over the last year.”

“Indeed, judging by the central bank’s regular survey of analysts, the consensus forecast on end2017 rates has now fully converged with our 8.0% call. That worries us – while we love becoming consensus, we hate being consensus. Based on recent developments, however, we are changing our call: while we re-affirm our below-consensus terminal Selic rate call of 7.0% for end-2018, we lower our end-2017 forecast to 7.5% from 8.0%.”

“As for the specific rate path from here, we foresee a cut of 100bp next week, rather than the 75bp we previously expected. The central bank is likely to slow down its pace eventually, so we now pencil in cuts of 75bp in September and 50bp in both October and December, pulling the policy rate down to 7.5% by end-2017. Early next year, two consecutive 25bp cuts in February and March would lower the Selic to a terminal rate of 7.0%. If anything, we think risks look biased for the policy rate to reach 7.0% even sooner than that.”