BNP: Brazil: Consensus revised down interest rates scenario

Brazil: Consensus revised down interest rates scenario.
2011.11.14 08:23 AM

Consensus scenario incorporated more rate cuts. The central bank's weekly survey presented small changes on the inflation front, remaining at current high levels. For growth, the market consensus revised down just its 2011 forecast, but kept stuck the 2012. For monetary policy, consensus extended its easing cycle by 50bp and now foresees a full easing cycle of 250bp.

Consensus on growth drifts lower just for 2011. On activity, in light of the recent weaker numbers, the consensus forecast for 2011 real GDP growth dropped another 4bp to 3.16%. For 2012, after falling steady all the way from 4.5% at the start of the year, the consensus forecast now remains stuck at the 3.50% at mark. We believe that the market expectations on growth will have to be revised down yet again going ahead. We foresee Brazilian real GDP growth slowing to 2.8% in 2011 and 2.5% in 2012.

While our 2012 forecast has seemed shockingly low for most observers, it is actually fairly optimistic, as it assumes steady recovery during the course of 2012. Still, things will probably get worse before they get better. Pay attention in the September monthly GDP reading (IBC-Br), to be out probably this week. It will be weak, and could force the consensus view to fall further.

Small changes on inflation expectations, again. The latest weekly survey of market consensus forecasts for inflation brought small moves down for the short-term period. Expectations for 12-month-ahead inflation edged up 1bp to 5.62%. Expectations for the calendar year of 2011 edged down 2bp to 6.48% mark, below the target ceiling of 6.50%. The median consensus forecast for 2012 edged down 1bp to 5.56%. Top-five forecasting institutions edged down their expectations for 2011 to 6.47% from 6.55% and revised down their forecasts for 2012 to 5.43% from 5.63%. The official target centre is 4.5%, and the tolerance ceiling is 6.5%. Inflation projections have already deviated from the 4.5% target centre for longer time horizons, too, including 2013-2015. For 2013, consensus view continued to be revised up, this week the median consensus forecast went up to 5.00% from 4.90%.

On monetary policy, the consensus forecast for the policy interest rate (Selic) moved down for 2012. Now the consensus sees a full easing cycle of 250bp ending in March. For the end of 2011, the consensus expects the Selic rate at 11.00%, or one 50bp cut more from here – the next policy meeting is on 30 November. For the end of 2012, the consensus scenario sees now the Selic rate at 10.00%, revised down from 10.50% last week. We continue to expect more aggressive cutting, for a full easing cycle of 300bp, taking the policy rate to 9.5% next year.

Looking ahead, the adjustment in consensus forecasts has more to go, in our view. There is more to come on downgrades to growth and interest rates, in our view. On the inflation side, expectations seem contained for now.

Marcelo Carvalho
Tel. +55 11 3841-3418
marcelo.carvalho@br.bnpparibas.com

Gustavo Arruda
Tel. +55 11 3841-3466
gustavo.arruda@br.bnpparibas.com

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