17/07/19|FLASHGustavoArruda,SeniorEconomist|BNPParibasdoBrasilSALucaMaia,LATAMFX/IRStrategist|BNPParibasdoBrasilSABrazil–ConservativeeasingcycleKEYMESSAGESWenowexpectBrazil’scentralbanktostartitseasingcycleinJuly,insteadofSeptember.TheBCBislikelytocutabout100bpintotal,wethink,in25bpincrements.Onbalanceofrisks,webelievetheBCBwouldprefertostayontheconservativesidebycuttinglessandatasmallerpace,ratherthanruntheriskofhavingtohikeratestoosoon.Thesizeofthecycleandthepaceofcutsmightchangeiftheeconomydoesnotreacttothestimulus.ThecentralbankhasthegreenlightfromtheCongresstostarttheeasingcyclefromJuly.Initslatestcommunication,thecentralbankhadindicatedthatanyeventualstimuluswouldcomeonlyintheeventofaconcretestepforwardinfiscalconsolidation.Followingtherecentpositivestepinthepensionreform,whichareexpectedtosaveaboutBRL850bnin10years,BCBshouldbemorecomfortabletoactnow.Bothinflationandgrowthindicatetheneedforpolicyaction.Wenowbelievethattheupcomingmonetarypolicyeasingcycleisnotamatterof‘if’or‘when’butof‘howmuch’and‘howfast’.Weexpectthecentralbanktobecautious.Betweenthetwoknownrisksofstartinganeasingcycle,weexpecttheBCBtobemoreconservativeandruntheriskofcuttinglessthanneeded,andbeingobligedtocutforlongerandattheendseeinflationfailingtoconvergetothetarget,ratherthanruntheriskofhavingtohikeratessoonerbecauseofextraaggressiveness.Reasonstobecautious•Pendingsocialsecurityreform:Althoughrecentdevelopmentswerepositive,thislandmarkoverhaulstillneedstopassasecondvoteintheLowerHouseinAugustandthentowinapprovalbytheConstitutionandJusticeCommissionintheSenatebeforebeingapprovedby49of81senatorsintworoundsofvotes.Allgoingwell,weexpecttheprocesstoendinlateSeptemberorOctober.•Fiscalstimulus:Thegovernmentisreportedlyconsideringarepeatoftheprogrammethatallowedhouseholdstoaccesscompulsorysavingsthatarenowblockedbylaw(FGTS).WhenformerpresidentTemerimplementedthemeasure,ithadasizeableimpactonconsumption.Althoughtheexpectationisforasmallerprogramme,thesize,agenda,orthenumberofhousehold...
