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Brazil

Petro reaction, Lula’s plans, hawkish central banks

Gustavo Petro’s win in Colombia’s presidential election has caused tremors in the country’s financial markets. While the appointment of a centrist finance minister could help to settle investors’ nerves, the global backdrop is turning increasingly unfavourable. In Brazil, Lula, the front-runner in the race for the presidency, unveiled policy plans that will, likewise, probably unnerve investors around the election there in October. Finally, the week was marked by further hawkish noises from central banks in the region. We’ve revised up our interest rate profile in Brazil and the upside risks to our interest rate forecast in Mexico are growing.

24 June 2022

Copom: revisiting the 2015-16 playbook

The latest Brazilian central bank communications give a strong signal that, when Copom stops hiking interest rates, it will act in a similar way to the end of the last tightening cycle in 2015. The lesson from that period is that rates will be kept high for a long time and, when an easing cycle begins, it will start very slowly. As a result, we have pushed some of the interest rate cuts in our profile from 2023 to 2024. We now expect the Selic rate to end next year at 11.00% (our previous forecast was 8.50%) and are sticking to our end-24 forecast of 7.50% (versus a current Selic rate of 13.25%).

23 June 2022

Four reasons why we expect further falls in EM equities

We think that stock markets in the emerging world will continue to struggle alongside their developed market peers over the next eighteen months or so, for four main reasons. Markets Drop-In (22nd June, 10:00 ET/15:00 BST): Join our Markets team for this special briefing on the outlook for equities, bonds and FX and a discussion about revisions to our forecasts. Register now

20 June 2022
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Banxico outlook, Brazil GDP, Colombia election

Given the Fed’s hawkish shift and the recent sell-off in the Mexican peso, we now think that Banxico will step up the pace of tightening with a 75bp rate hike next week, to 7.75%. Elsewhere, in Brazil, the recently-released activity and survey data have prompted us to revise up our already above-consensus 2022 GDP growth forecast, to 2.0% (from 1.3%). Finally, Colombia’s presidential election on Sunday between left-wing Gustavo Petro and populist Rodolfo Hernández on Sunday looks too close to call. One key point is that neither candidate seems committed to tighten fiscal policy to reduce medium-term public debt risks. World with Higher Rates - Drop-In (21st June, 10:00 ET/15:00 BST): Does monetary policy tightening automatically mean recession? Are EMs vulnerable? How will financial market returns be affected? Join our special 20-minute briefing to find out what higher rates mean for macro and markets. Register now  

Inflation & fiscal risks pushing Copom to tighten further

While the Brazilian central bank’s tightening cycle is drawing to a close, the statement accompanying yesterday’s 50bp increase in the Selic rate (to 13.25%) left the door open to additional hikes. With Copom sounding a little more worried about inflation and fiscal risks than before, we’ve nudged up our forecast for the peak in the Selic rate to 14.00% (previously 13.50%). World with Higher Rates - Drop-In (21st June, 10:00 ET/15:00 BST): Does monetary policy tightening automatically mean recession? Are EMs vulnerable? How will financial market returns be affected? Join our special 20-minute briefing to find out what higher rates mean for macro and markets. Register now.

Brazil IPCA (May 2022)

The fall in Brazilian inflation to 11.7% y/y in May suggests that Copom will continue to slow the pace of tightening with a 50bp Selic rate hike, to 13.25%, next week. But with inflation set to stay in double digit territory in the coming months, we doubt that this would mark the end of the tightening cycle.

Brazil’s economy showing signs of life

The solid 1.0% q/q rise in Brazil’s GDP in Q1, alongside the strength of the recent survey data, reinforce our view that the economy will fare better than most expect this year. However, we still think that Brazil’s growth prospects remain weaker than most other economies in the region.

Reasons for optimism in Colombia and Brazil?

Populist Rodolfo Hernández is now the favourite to become Colombia’s next president and this has buoyed local financial markets this week, but we think that the scope for a further rally is limited. Elsewhere, the past week has brought further signs that Brazil’s recovery is strengthening and the risks to our above-consensus GDP growth forecasts are now skewed to the upside. We are sending this Weekly two days earlier than usual because Capital Economics’ London office is closed on 2nd – 3rd June for the Queen’s Platinum Jubilee celebrations.

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