End in sight for Brazil’s easing cycle

With Brazil announcing another interest rate cut, we think the easing cycle is likely to end in December.

26/10/2017
Brazil-paulista-Ave-under-drizzle

Authors

Craig Botham
Senior Emerging Markets Economist

Brazil cut rates as expected to 7.5% from 8.25%, a slight reduction in the pace of easing this cycle. An accompanying statement suggested further slowing of easing from here.

Inflation low but creeping higher

While inflation remains very low by historic standards, it is beginning to creep higher, reaching 2.5% in September, and growth is also making a modest recovery. Against this backdrop, and in the context of an easing cycle which has delivered 675 bps of cuts in the last year, some policy caution seems justified. A reduction in the pace of easing will likely see a 50 bps cut in December.

Central bank may end easing cycle in December

The central bank’s inflation target remains 4.5%, and it expects this to be reached in 2018 and 2019. With policy rates at 7% following a December cut, this would mean real rates of 2.5%. This suggests December is likely to mark the end of the easing cycle with the policy rate at 7.0%, absent a serious deterioration of growth data, or persistent weakness in inflation.  This is now our base case.

Reform failure a risk

The central bank again flagged failure of reform efforts as a negative risk that would lead to higher inflation, which may serve to stiffen the spines of a few politicians as reforms again struggle.

Political noise is likely to build as markets look ahead to the 2018 elections, which could contribute to currency weakness. Globally, tailwinds helping to lower inflation for emerging markets are largely spent.

We think there is perhaps a 20% chance of one last cut in early 2018, based on falling inflation expectations and comments from the monetary policy committee that the neutral level rates may be lower than previously estimated. 

Important information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This article is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored.

Authors

Craig Botham
Senior Emerging Markets Economist

Topics

Follow us

Schroder International Selection Fund is referred to as Schroder ISF throughout this website.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

Schroder Investment Management (Europe) S.A. is subject to the UCITS law of 17 December 2010 and the AIFM law of 12 July 2013.