Central Bank of Brazil likely to cut key interest rate in January

The Central Bank of Brazil is expected to cut its interest rate during its meeting today, said Commerzbank in a research report. It was doubtful in the past few months whether the BCB would really be able to cut its interest rate by as much as the market was expecting.

The economy was able to urgently do with an accommodating monetary policy, and that the decline in inflation was giving enough scope for the central bank. There were mainly doubts regarding the effects of the Fed rate hike on the Brazilian real. In the past, emerging market currencies have always reacted sensitively to rate hike expectations in the U.S., noted Commerzbank.

But, in the past few weeks, the Brazilian real was able to appreciate markedly in spite of the Fed rate hike and rather hawkish comments. It was able to retrace the losses experienced after Trump’s election victory.

“Against this background it is a good opportunity for the Brazilian central bank to lower its key rate by 50bp this time round (following two 25bp steps)”, added Commerzbank.

Also, there is possibility that the central bank might hint at another 50 basis points reduction in its statement. This signifies that it is expected to become quite challenging for the Brazilian real to further gain against the US dollar. Therefore, there is quite little scope for an additional decline in USD/BRL and instead there is likelihood of renewed real weakness in the weeks ahead, stated Commerzbank.