Brazil May Want to Rethink Using IMF Forecasts

Brazilian central bank President Tombini said hello would take into account the IMF’s revised forecasts for a deeper recession when it meets this week to select policy. Sorry, but all of us don’t buy it. IMF forecasts shouldn’t affect a central financial institution. Yes, the IMF has excellent economists and often has excellent advice for its member countries. However, no policymaker worth their sodium should base their decisions on updated IMF forecasts. We’d add that the central bank usually refrains from making comments about monetary policy on the eve of policy meetings.

The IMF cut its 2016 forecast in order to -3.5% and its 2017 forecast to smooth. We cannot deny that these are significant revisions. Previously, the actual IMF saw Brazil contracting -1% this year and growing +2.3% in 2017. Yet the IMF forecasts merely bring it much more into line with market consensus, and do not really contain any “new news.”

The recognized statement from the central financial institution: “Central bank President Alexandre Tombini considers as significant the revisions of growth projections for Brazil in 2016 and 2017 completed by the International Monetary Account. President Tombini highlights that all relevant economic information available up to the Monetary Policy Committee meeting is considered in the decisions of the board.”

What does all of this really mean? The financial markets are taking it as a clear signal that the central bank won’t be as hawkish as expected. Consensus was for a 50 british petroleum hike this week to Fourteen.75%, but swap rates possess fallen sharply today in favor of a 25 bp backpack.

Indeed, the entire swaps curve shifted down in response to the dovish remarks. By reversing its hawkish prejudice and using the IMF forecasts as a cover to shift more dovish, the mixed signals from the central bank will likely keep investor’s very negative on Brazil.

Earlier today, Brazil reported the second preview for The month of january IGP-M wholesale inflation at +0.83% m/m vs. +0.69% expected. If this sustains for the entire month, the y/y rate might accelerate to 10.6% through 10.5% in December. Brazil then reports mid-January IPCA inflation Friday, and is expected to rise 10.74% y/y vs. 10.71% in mid-December.

With rising cost of living measures still accelerating, it is not a time to be more dovish. We do not think that a 25 british petroleum hike will help sentiment whatsoever, nor do we think that a hike will be “one as well as done.” Another hike seems likely at the March 2 meeting, but the magnitude from the tightening is now more unknown given the central bank’s remarks today.

Not surprisingly, Brazilian property are underperforming today. The deliver on its 10-year local forex government bonds is up nearly 20 bp to a whopping 16.40%. BRL is the worst performer in EM, down 0.5% on a day when the remainder of EM is rallying. The Bovespa is up nearly 1% today, but is actually clearly lagging the wider MSCI EM (up 1.6%).

Markets rightly believe that the government is leaning on the central bank to be more dovish, and that is simply not a good development in the current investment environment.

Central Bank's Dovish Tilt Will Weigh on Brazilian Assets is republished with permission from Marc to Market