Brazilian Central Bank likely to adopt waiting stance for time being

The favorable environment in Brazil, such as the BRL rally, decelerating inflation, relief on the political front has been beneficial for the Brazilian central bank, which took advantage of this environment and cut its key interest rate for the first time in four years in October. In its meeting minutes, the BCB hinted at the beginning of a rate reduction cycle; however, it also showed caution regarding the trend of inflation, noted Commerzbank in a research report.

But, since the last meeting of the Brazilian Central Bank, the environment has changed. Donald Trump surprisingly won the U.S. Presidential elections and the market now projects stronger rate hikes in the U.S. Therefore, the Brazilian real has weakened considerably. This is not a good climate for the central bank to cut rates further, said Commerzbank.

Hence, the BCB is likely to adopt a waiting stance for some time. If it cuts the key interest rate further, it might further risk additional depreciation of the real. This might reverse the positive trend of inflation. Therefore the Brazilian central bank is unlikely to further lower rates now. Like many other emerging market currencies, the Brazilian real is expected to suffer from higher interest rates in the U.S.

“We expect the BRL to depreciate to 3.50 against the USD until the end of 2017”, added Commerzbank.