Brazilian central bank likely to further cut rates by 25bps in November

The Brazilian Central Bank cut its key interest rate for the first time in four years in October by taking advantage of the favorable environment of the BRL rally, slowing inflation and relief on the political front. However, the central bank lower the rate by 25 basis points, as compared with certain analysts’ projection of a 50 basis points cut.

The meeting minutes of the Brazilian central bank showed that the BCB foresees risks that might act as a brake on the recent positive developments in inflation, noted Commerzbank in a research note. Consumer prices’ not all components have developed favourably. Within fiscal policy, a long and potentially rocky road continues to stay ahead. Overall, the central bank foresees scope for additional reduction in interest rates; however, it would take small steps for now.

The Brazilian central bank would increase its pace only when the situation continues to rebound significantly. The BCB is expected to cut interest rates by another 25 basis points by late November, according to Commerzbank.

The reduction in interest rate has not hurt the BRL. On the contrary, the BRL’s cautious action and an equally wary statement have been seen positively by the market. However, in the coming weeks, it might become tough for the Brazilian real to hold on to its gains against the US dollar. The USD/BRL pair is expected to trade around 3.25 by the end of 2016, added Commerzbank.