Brazilian Central Bank likely to cut interest rate by 50bps in November

The Brazilian central bank is expected to cut its key interest rate during its meeting tomorrow. According to a Societe Generale research report, the BCB is likely to cut rate by 50 basis points, with certain risk on the upside of just a 25 basis points rate cut given the likelihood of U.S. Fed tightening in December.

Inflation in Brazil continues to moderate, while the upside risk is fading. The monthly IPCA inflation in October slowed to 7.87 percent, whereas the IPCA-15 series indicated a further deceleration to 7.64 percent year-on-year through mid-November. In December, Brazil’s inflation is expected to decelerate further to below 7 percent as prices of food are declining. For the medium term, inflation is likely to fall to 5.6 percent year-on-year towards the end of 2017, stated Societe Generale.

Furthermore, the inflation outlook through the policy horizon (2018) continues to be conducive for the central bank to continue easing. Subdued labor market and large output gap are expected to exert downward pressure on inflation in the medium to longer term.

The Brazilian Central Bank began easing monetary policy during its October meeting. It lowered its interest rate by 25 basis points, the first cut in four years. During the October Copom, the bank discussed risks surrounding its inflation forecasts, such as inflation inertia and the high level of slack in the economy.

“We believe that gradual easing at the moment implies a total 200bp rate cut through 2017 (taking the Selic rate to 12.00%) before further easing in 2018”, added Societe Generale.