BCB likely to remain on hold - TDS

Sacha Tihanyi, deputy head of emerging markets strategy at TD Securities, expects the BCB to remain on hold at 6.50% at this coming meeting, however the devil will be in the details as there appears to be some space developing for Brazil to send an increasingly dovish message to the market.

Key Quotes

“The various scenario projections from the December inflation report indicate at or sub-target inflation for the coming three years, with 2019 expected to come in just shy of 4% with Selic and USDBRL based on market expectations. This suggests that there is little risk that the BCB will be incentivized to begin a hiking cycle any time soon, and in this vein we now don't see hikes beginning until Q3 of this year. The market has priced in a substantially more dovish view, which is consistent with the balance of risks, though we don't believe that we'll have it that the first hike is delayed for a year.”

“We do expect the BCB to err on the side of dovishness, and will look for any change in tone or emphasis regarding Copom's three key risks, with the first listed risk focus regarding the high level of economic slack being of key importance. As it stands currently there is still more risk that we sit at lower rates for longer for the BCB than there is of policy normalization being brought forward vis-à-vis our forecast.”