BCB Preview: Dovishness expected – TDS

Sacha Tihanyi, deputy head of emerging markets strategy at TD Securities, sees little constraint to not only a 50bp cut by the BCB at the October meeting, but also the risk that their forecast for a further 25bps in easing past October will be found to be ex-post too hawkish as the inflation is contained at or below target for projections through 2020, and the Brazilian economy is still operating with a great degree of slack.

Key Quotes

“Growth dynamics continue to disappoint with industrial production still dragging through August (at -2.3% Y/ Y), and September inflation disappointing survey expectations at 2.9%Y/Y. At issue is also the resumption in a downwards trajectory in headline price inflation, and the loss of upwards momentum in economic activity since the start of the summer.”

“Given the pension reform's relative success and the comfort the BCB has with BRL weakness during periods of broad USD appreciation (a dynamic that has strengthened the more the central bank has eased), it is not only highly likely that we get a 50bp rate cut, but there exists a notable degree of risk that the central bank eases by more, and/or indicates further easing to come. Insofar as this is concerned, it is important that the BCB retains the phrase "The Committee deems that the consolidation of the benign scenario for prospective inflation should permit additional adjustment of the degree of stimulus," in the October policy statement.”