Economic Analysis - Rate Cuts Not Quite Finished - 18 DEC 2017

BMI View : The Banco Central do Brazil will extend its rate cutting cycle into Q118, as it seeks to support economic activity amid low inflation. Rates will remain on hold in the quarters thereafter as inflation trends higher.

The Banco Central do Brasil (BCB) will likely extend its rate cutting cycle into Q118, and hold rates in the quarters thereafter. At its final meeting for the year on December 6, the BCB cut its benchmark interest rate by 50 basis points (bps), to 7.00%, and signalled its intent to enact an additional, but more modest, rate cut at its next meeting, which will conclude February 7, 2018. This came against our forecast that the Selic would end the year at 7.50%, as we expected the BCB to take no action in December due to an uptick in inflation and uncertainty over fiscal reforms ( see 'BCB To Shift To Neutral In 2018', September 6).

The BCB expressed comfort with inflation and a belief that economic activity needs additional stimulus. Though beginning to trend higher, inflation came in at 2.7% y-o-y in October, its fourth consecutive month below the BCB's 3.0-6.0% target band. Meanwhile, growth remains weak, expanding 0.4% m-o-m in September, in part due to weak investment. However, with President Michel Temer struggling to enact pension reforms and the 2018 election campaign approaching, investors are likely to remain cautious, which will mitigate the BCB's monetary stimulus.

Cutting Cycle Near Its End
Brazil - Inflation & Policy Rate
Source: BCB, IBGE, BMI

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