Policy rates have hit a record low in Brazil as the central bank delivered the expected 50 bps cut.
Despite the travails of pension reform, which had previously seemed a precondition for easing, the monetary policy committee also signalled a willingness to cut further in 2018.
We maintain our recently updated forecast for rates to end at 6.75% next year, implying one final, smaller cut of 25 bps.
The central bank did, however, caution that this forward guidance was susceptible to changes in the economic and policy backdrop, noting in particular that a failure of reforms could impact risk premia.
For us, this signals that should reform efforts fail, as seems increasingly likely, the central bank will be reluctant to cut more than once next year, if at all.
More aggressive easing is also not warranted by the economic data. The recovery seems to be on track and inflation is beginning to climb, though it remains well below the central bank’s target.