Credit Writedowns: Brazil central bank’s quarterly inflation report was quite hawkish, and caught the market off-guard after the decidedly more dovish minutes from the December 7/8 COPOM meeting were reported last week.In those minutes, the central bank put a lot of weight on its decision to hike reserve requirements December 3, calling it a “fast and powerful” tool to contain domestic demand pressures.Some took this as a dovish slant with regards to less need for SELIC rate hikes, but we disagreed then. Now, the bank wrote of the need to hike rates “in the short term.” We think this cements a 50 bp hike at Tombini’s first meeting January 18/19. We remain very bullish on the Brazilian economy and believe that COPOM must continue to tighten policy over the course of 2011. Brazil price pressures are largely demand driven, in our view, and with the economy continuing to growth above trend (thought to be around 4.0-4.5%), we see fairly aggressive tightening ahead. Read more…..
Note: The likelihood of a Brazil rate hike was reported one week ago here at the GEI News Blog.
