BRL likely to weaken over the course of the year, says Commerzbank

Inflation is likely to have eased further In July; expectations are for 2.7 percent. That would mean inflation would drop to below the central bank’s target corridor (3-6 percent). As a result the door is open for further rate cuts. In the central bank’s meeting minutes of late July it made it clear that it will cut its key rate by a further 100 basis points on September 6 (to then 8.25 percent).

That means something pretty serious would have to happen to stop it. Not even the political turbulence has stopped the central bank from changing course. However, the recent recovery in BRL has made its life easy.. The reform process has been slowed down by the political crisis.

This in turn makes a consolidation of national finances more difficult - something that would be urgently required in view of a budget deficit of approx. 9 percent of GDP. There is already speculation about this year’s target for the primary budget being missed. The country might face further ratings downgrades.

"Despite these risks BRL is able to stand up well in the current EM currency friendly environment. However, due to the continuous fall in interest rates, investments in Brazil are getting increasingly unattractive. We therefore expect BRL to weaken over the course of the year," Commerzbank commented in its latest research report.

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