Brazilian Central Bank likely to begin rate cutting cycle later this year

The Central Bank of Brazil had hiked its benchmark interest rate in late July 2015 for the last time by 50 basis points to 14.25 percent. Thus Brazil displays considerable positive real interest rates. The central bank has stated that they will continue to keep the rates at current levels in the near future. However, they are expected to begin lower rates later in 2016, said Commerzbank in a research note.

But the Central Bank of Brazil needs to see additional deceleration in inflation in order to do this. It would also need to see certain signs of progress with respect to lowering the huge budget deficit. The cutting of the enormous budget deficit depends on political developments.

The Brazilian politicians in April had voted to impeach President Rousseff, who was then replaced by Vice President Temer. Temer was initially for 180 days while Rousseff defends the charges and then until 2018 if she is actually impeached, noted Commerzbank. At the start of September, the Senate would be finally voting on the impeachment.

There are high possibilities that Rousseff would be banned from public office for eight years. However, there is no guarantee of stability as corruption investigations continue into a broad array of senior PMDB politicians, stated Commerzbank. Political risks in Brazil are expected to remain high.