Forex Flash: Market too hawkishly positioned regarding the BRL – TD Securities

The Copom left the Selic rate unchanged at record low 7.25% as expected, although the market was pricing in a meaningful probability of rate hikes already this month. "However, the communiqué did come through with a message that reads more hawkish than we had expected", wrote analyst Cristian Maggio, pointing to potential rate hikes earlier than expected. “Yet, a move at the April 17th meeting still looks unlikely as the Copom voted unanimously for keeping rates unchanged (so there is no evidence yet that the Committee is getting divided on the direction of monetary policy)”, added Maggio.

TD Securities analysts believe the BCB will be happy with anchoring inflation somewhere in the 2% upper-part of the tolerance band, between 4.5% and 6.5%. “Any acceleration persistently above 6.5% though could be a big problem that requires earlier action from the Bank”, they wrote, highlighting that rates should have already been hiked (or never lowered to current levels) given the risk of slippages on the inflation target.

“At the same time, we recognize that there’s a lack of ‘political’ willingness to do what it takes to bring back inflation to 4.5% and, for this reason, we continue to believe that the market is too hawkishly positioned, even in the event of an early resumption of monetary tightening”, concluded Maggio.