JPMorgan Sees Higher Key Rate, Sub-1% Economic Growth in Brazil

JPMorgan Chase & Co. analysts jacked up their Brazil interest rate forecasts while nearly halving their 2022 economic growth estimate as annual inflation runs at a five-year high and political tensions simmer.

Policy makers will lift the Selic to 9% by February 2022 in a cycle with three straight hikes of a full percentage point and a final one of 75 basis points, according to analysts Cassiana Fernandez and Vinicius Moreira. They also see gross domestic product growing 0.9% next year, down from 1.5% before.

Central bankers could decide to act even more aggressively to tame rising inflation expectations, according to Fernandez and Moreira, who previously forecast borrowing costs would rise to 7.5% at the cycle’s end.

“The recent decisions of the monetary authority and our reading of their recent public pronouncements ahead of the Copom meeting next week suggest that this is an open possibility,” they wrote in a report published Monday. 

JPMorgan Sees Higher Key Rate, Sub-1% Economic Growth in Brazil

Policy makers led by Roberto Campos Neto have hiked borrowing costs since March and signaled another increase of a full percentage point at their Sept. 22 meeting. A severe drought is driving up electricity bills just as the economic reopening pressures services prices. While President Jair Bolsonaro signaled a truce with the Supreme Court, political tensions have not fully dissipated. 

Hiking Odds

Annual inflation hit 9.68% in August, above the central bank’s goal of 3.75%. The consumer price jump was widespread, with eight out of nine product and service categories surveyed by the statistics agency registering gains. 

Faster cost of living increases could push central bankers to “act fast” to tame inflation expectations, Campos Neto said during an event last week.

Read more: Economists Sees Bigger Brazil Rate Hikes After CPI Surge 

On Monday, the short end of the swap rate curve showed bets of a hike of at least 125 basis points next week. Digital options in the local stock market show 70% odds of an increase of more than 100 basis points. 

Policy makers will lift the Selic to 8% at year’s end, above the previous estimate of 7.63%, according to a weekly central bank survey published on Monday. Economists also raised their 2022 key rate forecast to 8%. 

Meanwhile, consumer prices are expected to rise 8% in December and 4.03% at the end of 2022, both readings above target. Analysts lowered their economic growth estimates to 5.04% in 2021 and 1.72% next year.  

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