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Brazilian central bank likely to remain at sidelines for some time despite low inflation - Commerzbank

Brazil’s central bank cut its key interest rate on Wednesday to 6.75 percent as expected. It also hinted at a pause in the rate cut cycle that has been going on since October 2016. There are several factors that would affect as to whether the pause will turn into the end of the cycle, noted Commerzbank in a research report.

The inflation data for Brazil for the month of January was released yesterday and it came below consensus expectations. Immediately there were considerations for a possibility of further reduction in rate in March. That appears to be premature, however. The central bank is also keeping a close watch on progress with the pension reform. The vote in parliament is likely to take place on 20th February. However, the required majority of 308 votes have still not reached. Rodrigo Maria, who is the speaker of the lower house, stated that there are at present 250 MPs who would vote in support of the reform. The dominant feeling on the market is pessimism on when the reform would finally be passed, stated Commerzbank.

Therefore, the central bank is expected to take to the side lines for now and might keep a close watch on the development of the pension reform, the election campaign, the financial markets and inflation. If these parameters develop in a favorable manner the central bank might lower its rate again. It has kept the door a bit open for another reduction in its statement.

“However, this is not an issue for BRL as the central bank is likely to consider a possible rate cut very carefully”, added Commerzbank.

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