Brazilian central bank likely to start easing monetary policy in October

The Brazilian central bank is expected to start easing its monetary policy during its October Copom meeting. Recent releases of inflation imply that food inflation has started slowing and that this process is expected to carry on in the coming few months.

Moreover, price pressure has softened in almost all the major spending categories as the Brazilian real is strengthening in year-on-year terms and the base effect in many categories is assisting in easing inflation.Therefore, inflation is expected to moderate more quickly than estimated recently, noted Societe Generale in a research note.

“We now estimate 4Q16 average inflation at 7.4 percent yoy (7.0 percent for December). 2017 year-end inflation is now tracking at 5.6 percent on our estimates and has led us to cut our forecast for average 2017 inflation by 0.6pp to 5.9 percent”, added Societe Generale.

In the meantime, the recent industrial production reports imply that in spite of the likelihood of an early bottoming, the economy is still expected to shrink in the third quarter and that it will not accelerate significantly in the medium term. On the growth front, it is quite vital that the Brazilian central bank starts easing its monetary policy as soon as possible now that attempts on fiscal consolidation have started, according to Societe Generale.

“The BCB will likely start easing in October (-25bp to 14.00 percent) followed by a 50bp cut in November on the assumption that inflation will moderate further and Congress will approve the bill to cap public spending”, said Societe Generale.

There is certain risk that the central bank would add dovish tone to its statement without lowering the interest rate this month. But there are high chances that the easing cycle would start in 2016 unless it is threatened by renewed risks of high food inflation.