Brazil: Another 25bp rate cut from BCB looming? - Rabobank

Analysts at Rabobank, points out that the BCB announces interest rate on Wednesday (May 16) and they (and most market players) are looking for another 25-bp cut to 6.25%, a new historical low and likely the last move in this cycle.

Key Quotes

“Amid increased (FX) market volatility, the BCB is pointing to a “guidebook” reaction under an inflation-targeting regime (i.e. expectations, activity as key drivers). There is an apparent unwillingness to overreact to a slight tilt in the balance of risks (following the FX sell-off).”

“Additionally, and most importantly, the baseline inflation outlook is virtually unchanged for the key policy horizons, since the last meeting. No need to change the flight plan now.”

“With a solid balance of payments and low inflation expectations, in spite of lingering political/fiscal uncertainties, such a rate cut is sign of a different time, compared to other EMs currently and other periods in Brazilian history, when higher rate used to follow a global shock. Yet that (positive) picture is only about to last if the key fiscal reforms pass in 2019.”

“We look for a relatively “hawkish” policy guidance in the statement, with a view to limit the risk of a new hypothetical round of FX weakness after the Copom announcement. The flight plan (i.e. pause in June) will probably be more emphasized now than in previous meetings.”