Brazil’s Central Bank Set for Bold Rate Cut: Decision Day Guide

(Bloomberg) -- Brazil’s central bank is poised to deliver a bold interest rate cut for a second straight meeting as policy makers rush to the aid of a weak economy while favorable conditions persist abroad and inflation remains under control.

All 47 analysts in a Bloomberg survey expect the monetary authority to cut the Selic rate on Wednesday by a half percentage point to a record low of 5.5%, just hours after the U.S. Federal Reserve is forecast to also ease its monetary policy. There’s no consensus, however, on whether Brazil will maintain that pace of easing in subsequent meetings.

Brazil’s Central Bank Set for Bold Rate Cut: Decision Day Guide

Most economists surveyed by the central bank expect borrowing costs to fall another half a point by the end of the year and remain at 5% through 2020. But some, including Santander, estimate they will fall to as low as 4.5% by December.

Brazil’s central bank, led by its President Roberto Campos Neto, is following peers from Europe to Chile who are boosting stimulus in the face of waning growth and tame inflation. Still, a sharp weakening of the local currency amid international trade tensions and, more recently, a spike in crude oil prices following an attack on Saudi fields have raised concerns that conditions for additional rate cuts may not remain in place for long. That uncertainty may prompt policy makers to keep their options open going forward.

What Our Economist Says

All stars are aligned for a bold policy move in this meeting: consensus for 2020 inflation remains below the target, and several countries are easing their monetary policies. We believe the BCB will cut 50bps at this meeting, but what it does next is still unclear. The statement could offer hints of how BCB sees the outlook for growth and for the currency, and help assess if and at what pace it will continue to cut.
--Adriana Dupita, Latin America Economist at Bloomberg Economics

Wednesday’s decision will be published on the central bank’s website after 6:00 p.m. local time in Brasilia, together with a statement from the institution’s board.

Here’s what to watch out for:

Global Outlook

Investors will scour the statement for remarks on how a turbulent world economy will affect monetary policy. Until now, the central bank has emphasized that global growth and inflation expectations are declining, and that Brazil has tools to defend itself in the event of volatility. That may change now that the real has weakened 7% since the easing cycle started in July, and oil prices soared this week. Fuel costs are a hot button issue in Brazil, as they have led to both massive inflation shocks and nationwide strikes in the past. “The central bank may be more cautious with the uncertain global outlook,” said Mario Mesquita, chief economist at Itau Unibanco.

Brazil’s Central Bank Set for Bold Rate Cut: Decision Day Guide

Inflation Outlook

Investors will pay attention to 2020 inflation expectations the central bank will release in its post-meeting statement -- and how close they are to the 4% target. Policy makers have been explicit in saying that Brazil’s price outlook is improving, especially following the advance of a long-sought pension reform. Market inflation forecasts have fallen further below target both this year and next, and there’s little evidence of pass-through from a weaker real, according to Patricia Krause, Coface’s Latin America economist. Central bank numbers corroborating that view may pave the way for more half-point cuts, while higher expectations would signal the opposite.

Brazil’s Central Bank Set for Bold Rate Cut: Decision Day Guide

Domestic Recovery

The central bank board is expected to give fresh insight on Brazil’s economic recovery. In the minutes to its last policy meeting, it wrote that growth will show “some acceleration” going forward. Since then, second-quarter GDP beat economists’ estimates, while strong retail sales and service sector prints at the start of the third quarter added optimism. Still, unemployment remains in the double digits and represents a main obstacle to stronger expansion.

©2019 Bloomberg L.P.

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