Snapshot

Brazil's central bank does not disappoint


Brazil’s central bank eased policy more than expected, cutting 50bps to take the headline rate to a record low 6.0%. More easing is likely to come given the positive direction of travel in pension and other reform agendas.

It has become easier and easier for the central bank to justify a dovish stance. Growth has been disappointing for a long time, and the situation was worsened in the first quarter by the January disaster at the Brumadinho dam.

What is the outlook for inflation?

In better news, inflation has also been weaker of late, sinking to 3.4% year-on-year (y/y) in June from 4.7%. This muted inflation seems likely to persist now that the impact of last year’s truck drivers’ strike has dropped out of the figures. Encouragingly, inflation expectations have also continued to decline, and stand at 3.5%.

Though some of this reflects a global trend for weaker inflation, we think it also reflects the success of the inflation targeting regime in Brazil. It is easy to forget that inflation ran at over 10% y/y as recently as 2016. The central bank has restored a degree of credibility, and combined with real policy rates in excess of 3%, this gives it space to ease against the backdrop of a weakened economy.

Reform progress underpins dovish stance  

The ultimate catalyst for a more dovish approach has been the developments in the seat of power, Brasilia. The forward momentum of pension reform points to successful passage by October, removing a major source of uncertainty for Brazilian assets.

This matters particularly through its impact on the currency. As the outlook for reform has improved, the real has enjoyed a strong period of performance and contributed to disinflationary pressures. This can now be taken as permanent state of affairs, and the risk of an inflationary spike manifesting through the currency is consequently greatly reduced.

This article is issued by Schroder Wealth Management (US) Limited, a firm authorised and regulated by the Financial Conduct Authority and registered as an investment adviser with the US Securities and Exchange Commission. Registered office at 1 London Wall Place, London EC2Y 5AU. Registered number 10761882 England. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Schroder Wealth Management (US) Limited unless otherwise stated. For your security, communications may be recorded and monitored.

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