GRI’s Weekly Risk Outlook

GRI’s Weekly Risk Outlook

Brazilian inflation is on the rise with the potential for broad economic consequences. South Korea appears headed toward more accommodative monetary policy. Greece faces a possible credit downgrade as political turmoil continues. All in this week’s GRI Weekly Risk Outlook. 

Brazil: inflation upswing

Inflation in Brazil is on the rise and likely to continue on an upward path – away from the Banco Central do Brasil’s (BCB) 6.5% ceiling. Ahead of its upcoming policy meeting on January 21st, we expect the BCB to raise the benchmark rate (Selic) by at least 50 basis points in the wake of the 0.25bp and 0.5bp rate hikes in October and December, respectively. At a three-year high of 11.75%, the Brazilian central bank is forecasted to raise the Selic to at least 13% this year in a bid to curb a high rate of inflation that has eroded business and consumer confidence.

Echoing Mario Draghi’s notorious words, BCB chief Tombini reiterated in a statement last December that the central bank would do “what’s necessary” to bring inflation down to its 4.5% target by 2016. But monetary policy alone will not suffice in combatting inflationary pressures.

Although the government’s January 8th announcement regarding its aim to cut the monthly discretionary spending ceiling by 30% sends a positive signal in showcasing fiscal discipline and reducing a growing budget deficit, tax raises and further spending cuts will be necessary to curtail inflation.

Moreover, the inevitable rise in domestically regulated prices – particularly bus fares, electricity tariffs and gasoline – will bolster inflation in the months ahead as the government can no longer afford to keep them artificially low. With additional pressures deriving from the drought conditions that are pushing food prices up, an intensifying risk of power-shortages lifting electricity prices by 20-30% and a weaker real that is increasing the cost of imports, inflation is forecasted to reach 7% as early as this month, exerting significant pressure on the BCB to prolong its rate hike cycle.

With the spectre of stagflation taking centre stage, Brazil’s credit rating is likely to take a hit in 2015. With near-zero growth in 2014 and increasing odds of a GDP contraction in 2015, Brazil’s investment grade is expected to be lowered further in the wake of rating downgrades and negative outlook revisions throughout 2014.

Bank of Korea: inevitable ease

Expectations have been raised regarding the prospects for the Bank of Korea (BoK) to lower the benchmark rate in its upcoming policy meeting on Thursday, January 15th – as it sees inflation sliding further in the months ahead.

With a significant fall in household inflation and disinflationary momentum on key import products (mainly food and energy) relieving external and domestic price pressures, the BoK is likely to loosen monetary policy in the first two quarters of 2015.

With year-end inflation hovering just above 1% and the January print falling to 0.8%, the BoK’s December acknowledgement that price levels will continue to be low for a considerable time sheds light on the expectation that 2015 monetary policy will be accommodative.

With the fall in crude prices weighing heavily on domestic inflation, the absence of internal inflationary pressures and below-potential GDP growth, an inevitable ease in monetary policy is on the cards for the BoK, with a possible 50bp cut by the end of H1 2015.

Greece: looming credit downgrade

Fitch is expected to publish its ratings review of Greece on Friday, January 16th. Given the political risks emanating from the early election of January 25th, we see it probable that the rating agency will at least change its current rating outlook to negative.

In a December 30th, 2014 press release, Fitch warned that the snap elections would add to Greece’s credit risk. It cited two main channels through which political risk could deteriorate the Hellenic nation’s creditworthiness. The first one would be the strain on the government’s cash flows emanating from a prolonged deadlock with the Troika; in tandem with reduced international capital market access. The second would relate to the degree to which the Greek economy could be strained by intensified capital outflows, in turn dependent on how bank depositors react to the post-electoral developments.

However, these two possible outcomes will no doubt put pressure on a newly elected government to expedite an agreement with its foreign creditors. Notwithstanding, risks of protracted negotiations will be higher in the event that a Syriza-led coalition wins the elections, with negative spillovers arising from possible delays in concluding an agreement.

The GRI Weekly Risk Outlook (WRO) provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, the WRO presents a series of potential upside/downside risks, shedding light on how political decisions impact economic outcomes.

The WRO is written by GRI analyst Jose Luengo-Cabrera

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