Brazil Central Bank on hold for now, risks tilted towards earlier cuts

Brazil currently experiences its worst economic performance since the 1930’s, and with a combination of high inflation and large declines in terms of trade is unlikely to see much improvement. Brazil's economy is shrinking fast and political uncertainties remain a key risk. Even though a transition president, in case of an impeachment, could help to lift confidence and make some small policy adjustments, any major reforms look unlikely.

Inflation rates have spiked in 2015 alongside the slide in the Brazilian real. March 2016 CPI levels printed around 9.39% in y/y terms, which is way above BCB’s 4.5% inflation target. While still far above the upper band of the target, inflation has finally started to ease during the last months as the base effects of last year’s hikes in some regulated prices are slowly fading.

The recent strengthening of the BRL has also helped to create a more favourable inflation environment. As a result, inflation expectations have crept lower. Poor fundamentals argue that the central bank will not want excessive BRL appreciation.

"We expect the Banco Central do Brasil (BCB) to keep rates unchanged at 14.25% this year, and to start easing monetary policy next year. Risks are towards earlier cuts to support growth, despite high inflation." said Nordea Bank in a report.