Brazil: Slower Pace Of Cutting Ahead, As BCB Begins To Doubt Disinflationary Trends

• Fitch Solutions expects that the Central Bank of Brazil (Banco Central do Brasil - BCB) will cut its policy rate from 10.50% to 9.50% by year-end (9.25% previously forecasted), with economic resilience and uncertainty surrounding the government’s fiscal policy stance set to see the central bank adopt a slightly less hawkish stance.
• The BCB lowered its policy rate by 25bps at its May 8 meeting, having guided back in March that it would move by 50bps. Officials signalled that they would take a meeting-by-meeting approach in the coming months.
• While the external picture has improved somewhat, BCB officials indicated in May’s policy statement that they are not comfortable remaining on autopilot in the current environment and will instead shift to a more data-dependent approach; which has been the stance for most global central banks.
• Consistent with this slightly hawkish shift, the BCB’s committee also revised its end-of-year inflation forecasts modestly from 3.5% at the time of the last meeting to 3.8% (target: 3.00%).
• Risks to Fitch’s forecasts are tilted in favour of a slower pace of loosening in the coming months. In addition to domestic economic factors (eg. the Brazilian government’s moves to use new fiscal rules this year to boost spending), a pick-up in global financial market volatility is another development that could see the BCB take a more cautious approach.

 (Source: Fitch Solutions)