Brazil Acts On Rates

Brazil Sets Stage For Faster Rate Cuts

This month Brazilian Central Bank (BCB) cut the Selic rate by 75basis points. The unanimous decision surprised many market watchers and consensus (expecting a 50bp cut), though it was not completely unexpected by the market. The increase in pace from 25bp (in the previous two meetings) to 75bp was followed by a communique that brings downward revisions to some of the bank’s inflation forecasts. In this environment, we believe the 75bp pace will continue in the next two meetings. In addition, a number of market analysts have revised their Selic forecasts downwards.

“We refrain from a bigger downward revision in our end-2017 estimate given that the bank’s inflation forecasts (when already accounting for expected rate cuts) are still very close to the 4.50 percent target in 2017 and 2018,” Joao Pedro Riberio, a Latin America strategist with Nomura Securities writes in a note to clients on January 11th.

The bank has also indicated that the 75bp is a “new pace of easing”. This suggests that it is now going to be the benchmark pace going into the next few meetings. Concerns with risks stemming from the external sector were also raised. but downplayed as, according to the Bank, “the end of the benign environment for emerging economies has had a limited impact so far”.

All in all, the latest rate cut by the central bank is a (mostly, not entirely) surprising decision. “It increases our expectations that the BCB will pursue closer-to-neutrality interest rates,” Riberio said, “more quickly, with front-loading of the cutting cycle.”

“In this sense, not only do we expect the 75bp cut to remain in coming meetings, but we also revise down our year-end Selic forecast, from 10.0% to 9.50 percent. We refrain from a larger downward revision given that the bank’s market scenario forecasts are basically at target.”