Brazil's central bank cuts, and might accelerate easing
Falling inflation expectations give scope for further rate cuts.
Unstructured Learning Time
The Brazilian central bank announced a rate cut of 75 basis points (bps), to 12.25%, as expected. The decision was unanimous and reflected favourable inflation developments and mixed signals on activity.
The balance of risks at this point was seen as neutral but the door was left open for acceleration in the pace of easing.
Potential for further rate cuts
Inflation momentum gives the central bank plenty of scope for easing at this juncture. Survey-based inflation expectations for 2017 have fallen marginally to 4.4%. Meanwhile, the central bank’s projections of inflation using the market-implied pace of rate cuts (so, 9.5% by year-end) has inflation falling to 4.2% at the end of this year compared to a 4.5% target.
Should activity disappoint, therefore, the central bank has signalled it would be comfortable in cutting more rapidly.
Focus on activity data and reforms
Indeed, the accompanying statement emphasised that a possible acceleration of easing would depend on activity data. The terminal rate, or the end of the cycle, would depend on the estimates of the structural interest rate.
It was mentioned that reforms could lower this structural or neutral rate, and so progress on reforms might imply a more extended easing cycle than the market is currently pricing.
To us, this suggests a positive balance of risks for the economy, at least from a monetary policy standpoint.