Economics

Brazil cuts rates with further easing likely

Lingering concerns over inflation constrain more aggressive cuts for now.

20/10/2016

Craig Botham

Craig Botham

Emerging Markets Economist

In a much anticipated move, Brazil’s central bank cut rates by 25 basis points in a unanimous decision, disappointing some market economists who had called for a larger 50 basis point cut. Still, the accompanying statement left the door open to further easing next month.

Inflation starting to moderate

The rate cut comes as recent Brazilian activity data have disappointed, and inflation has begun to moderate. Beyond macroeconomic data, we have also seen positive political developments towards addressing the fiscal issues facing Brazil. All of these will have helped to make the case for easing, so why not ease more aggressively?

In its statement, the central bank cited uncertainty around needed adjustments (i.e. those positive political developments need to yield something concrete) and concerns over the relative stickiness of inflation.

So if we see passage of the spending cap bill and continued support for fiscal reform, the central bank will reward policymakers with more easing, and the extent of that easing will be data dependent.

Rate cut a boost to consumers

The rate cut is a welcome boost to the Brazilian economy, particularly to consumers struggling with high debt costs. Still, after a long credit cycle, leverage (borrowing) is high and households will likely want to deleverage further before considering new borrowing.

Nonetheless, an easing cycle will reduce the drag on the economy from the existing debt burden, and should support the nascent investment recovery. We expect at least another 50 basis points of cuts this year.