Brazilian Real: Rate-cut pause but medium-term gains – Commerzbank

Commerzbank’s Norman Liebke expects the Central Bank of Brazil to pause its rate-cutting cycle at 13.75% amid fiscal and inflation concerns after Lula’s re-election. He notes unanchored inflation expectations but argues this is only a pause, with further cuts likely next year. Liebke sees scope for lower rates and anticipates the Brazilian Real will appreciate over the medium term.

BCB pause before further easing

"This evening at 10:30 pm Central European Time, the Central Bank of Brazil (BCB) will announce its interest-rate decision. A large majority of respondents to the Bloomberg survey expect the BCB to pause its rate-cutting cycle. According to the BCB’s weekly survey, analysts now expect only one further 25-basis-point rate cut by year-end, compared with three cuts previously. "

"This is mainly due to heightened fiscal concerns and inflation risks following President Lula’s surprise re-election. Inflation expectations through 2029 have risen and remain above the 3% inflation target."

"The BCB’s more cautious communication also points to a pause. At its previous meeting, it already stressed the need for a cautious approach to monetary policy given the high level of uncertainty and unanchored inflation expectations, while indicating that it would closely monitor further developments."

"Following the election, the BCB is therefore likely to wait and see how developments unfold, particularly regarding fiscal policy announcements and inflation expectations."

"Overall, the Brazilian real should benefit, which is why we expect the BRL to appreciate over the medium term and maintain our forecast."

"However, this is more likely to mark a pause than the end of the rate-cutting cycle. Further rate cuts are likely to follow by next year at the latest. With the policy rate at 13.75% and inflation at 4.6%, the BCB still has scope to lower rates further from their currently restrictive level, which would also narrow the interest-rate differential versus the USD."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)