Brazilian Central Bank cuts rates, more to come at end of May
Alejandro Hardziej, Fixed Income Research, Julius Baer
The easing cycle in Brazil continues. Yesterday, monetary authorities decided to cut the benchmark Selic rate from 12.25 per cent to 11.25 per cent. Since the start of the year, they have reduced it by 250 basis points and we believe another 75bps-100bps cut is likely in the next meeting on 31 May 2017. Inflation in March declined to 4.6 per cent y/y and market consensus for 2017 is 4.3 per cent, both of which are well within the 4.5 per cent (+/- 1.5 per cent) target. On the other hand, gross domestic product (GDP) in Q4 2016 contracted by 0.9 per cent q/q and 2.5 per cent y/y, calling for easier monetary conditions. Overall, yesterday’s decision did not come as a surprise and we expect the economy to continue to recover in coming quarters.
Inflation has been surprising on the positive side for months and is now within the Central Bank’s target, while the latest GDP figures were slightly disappointing. Given how high interest rates in Brazil are, the extent of the cut does not come as a surprise and we expect further rate reductions in May.