Schroders’ Emerging Markets economist, Craig Botham, comments on the Brazilian central banks decision to cut rates and how he expects another cut in May.
As had been widely expected, the Brazilian central bank cut rates a full 100 basis points (bps), taking the headline policy rate to 11.25%.
There appears to be no dissent on the policy committee, with a unanimous vote and a statement indicating 100bps as the preferred rate of easing. A repeat then seems likely in May. Rates are now 300 bps lower than at the start of the easing cycle in October of last year.
A large cut was always on the table given how drastically inflation has fallen over the past year, from a peak of 10.7% in January 2016 to 4.6% this March. With an upper inflation target of 6.5%, an economy clearly operating far below trend growth, and rates in the double digits, the speculation was that, if anything, further acceleration in the cutting cycle might be on the cards.
Perhaps one reason the central bank is happy to stick with the current pace of easing is its view that domestic activity has shown signs of stabilising since their last meeting. It is true that we have seen some modest improvement in PMIs, retail sales, and industrial production. The committee does however remain concerned about uncertainty on global growth and commodity prices. This is an important factor for Brazilian exports – though Brazil is not a heavily-trade dependent emerging market economy.
The accompanying text released by the central bank again stated that the length of the easing cycle would depend on estimates of the structural rate (to be assessed by the central bank over time), economic activity, inflation forecasts and expectations. The latter continue to fall, now at 4.1% for 2017 and 4.5% for 2018 – in line with the bank’s own forecasts.
Another 100 bps cut seems likely in May, and a reduction in the pace of easing may be hinted at then. However, given our own view that we could see global activity face greater headwinds in the second half of the year, the caution expressed over global growth may keep the central bank slightly more dovish for longer.