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The Brazilian central bank is expected to cut its key rate by an impressive 100 basis points tonight; that is certainly what a poll amongst analysts would suggest. Some are even expecting 125bp. The development of the rate of inflation over the past few months justifies much lower interest rates.
Despite the central bank’s rate cuts since October 2016 from 14.25 percent to 12.25 percent real interest rates stand at 7 percent. After the last 75 basis points rate cut in February the central bank had communicated very clearly that more pronounced rate cuts may be possible, Commerzbank reported.
The required preconditions seem to have been fulfilled: a further fall in inflation and inflation expectations, disappointing GDP in Q4, only weak signs of an economic recovery and above all a stable BRL and a positive market environment.
The latter seems to have been the reason why the central bank waited for a long time before initiating the rate cut cycle and why it acted very cautiously initially. And this in turn is the reason why BRL was able to appreciate despite the rate cuts.
"We expect a 100bp rate cut for today, but would not completely exclude a 125bp step. The central bank is likely to be keen to make the most of the optimistic market environment and to cut interest rates as quickly as possible. BRL is unlikely to be affected by the central bank’s decision again this time, thanks to the credibility the central bank managed to establish for itself," the report commented.