Brazil: Political crisis to result in mildly disinflationary effect for the short/medium run - Rabobank

Mauricio Oreng, Senior Brazil Strategist at Rabobank suggests that economic/market consequences of the latest episode of Brazil’s political crisis is that, it would result in a mildly disinflationary effect for the short/medium run, owing to a slower activity improvement (assuming no market stress, as has been the case lately).

Key Quotes

“We also see a large inflationary impact for the medium/long term, in case of failure to pass reforms (especially on pensions), which would bear heavily on the fiscal solvency outlook.”

“If the pension reform sees no advances this year, the Brazilian economy will likely walk a thin layer of ice in months ahead (hoping for the Fed, ECB not to change their policy stances). However, we still look for at least minimal advances in the pension-system overhaul in 2017.”    

“While fiscal reforms are a necessary condition for a sustainable decline in inflation and interest rate, the uncertainty about it has not materialized so far. Thus, the BCB will (and correctly so) focus for now on the visible, tangible economic factors feeding an extremely favourable cycle for the achievement (or even some undershooting) of the inflation targets.”

“Seeing difficulty to find a reliable mapping between the cycle-uncertainty binominal and the optimal speed-depth of rate cuts, amid such a complex scenario, we have recently aligned to the consensus for the next Copom meeting (Wed, July 26), looking for a Selic cut of 100bps to 9.25% (we previously called for a move of 75bps). We have also revised our projection for end-2017 to 8.0% (from 8.5%) and for the end of cycle (1Q18) to 7.5% (from 8.0%).”