by José de Castro
SAO PAULO (Reuters) – JPMorgan has once again adjusted its projections for higher interest rates this week, at 1.5 percentage points, and the Selic level at the end of the monetary tightening cycle, now seeing a rate of 11.25 % which, even so, will be insufficient to bring next year’s inflation to the target.
The new hike comes less than a week after the US bank surprised markets by raising its forecast of interest rate hikes this week to 1.25 percentage points. Several financial institutions later also changed their “calls”, with some seeing a 1.50 point increase on Wednesday.
With this Monday’s review, JPMorgan reinforces the chorus of this team. The bank argues that, unlike the expectation that underpinned the 1.25-point increase scenario, over the past weekend there was no sign that the government and congressional leaders would be willing to “at least” contain plans for an even greater increase. public spending.
In addition, JPMorgan continues, the deterioration of inflation expectations both based on market prices and analyst estimates was “even more severe”.
The financial institution cites Bacen’s Focus report released this Monday morning, which, it noted, brought forecast inflation of 4.40% for 2022 (higher than the 3.75% target) even with a forecast of 9 Selic. 5%, above the previous projection. Also, expectations for the 2023 and 2024 IPCA “began to sag for the first time,” the private bank said.
“The failure to restore confidence about medium-term policy prospects should lead to a more aggressive monetary policy response by the Central Bank this week,” said Cassiana Fernandez (chief economist at the bank in Brazil) and Vinicius Moreira ( economist) in a report.
“With the growing risk of the BC losing control of inflation expectations, mainly through another round of negative pressures on the real, we now believe that the BCB will opt for an increase of 150 basis points, in line with market pricing , to avoid this scenario in an environment of high risk premium for monetary policy,” they added.
Economists believe that the Bacen statement will indicate “at least” another interest rate hike of the same magnitude in December.
Anticipating that the fiscal backdrop will not improve in the near term and that inflationary pressures will increase with a weaker exchange rate and ongoing global setbacks in supply chains, JPMorgan believes the BC will raise the Selic by 1 percentage point each one of the first two Copom meetings in 2022. As a result, the terminal rate will hit 11.25% until March, well above the current 6.25%.
“Considering the BCB’s reaction function so far, we have not ruled out even more aggressive move this week to anticipate the cycle as the BCB decides whether to formally recognize that the latest developments would trigger a fiscal regime change,” JPMorgan economists said.
Even with the Selic comfortably going above double digits, the US bank revised its 2022 inflation estimate upwards to 4.5% (from 3.9%).
“In this environment of high interest rates, still high inflation and lack of visibility on the fiscal policy front, we are also revising our growth models in line with this regime change that puts downward pressure on our already below consensus forecast of 0.9% (For GDP growth in 2022.) For now, we can’t even rule out a recession next year,” the economists concluded.
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