Brazilian Central Bank (BCB) to Proceed with 50bp Interest Rate Cut Today Amidst Challenging External Environment

Brazilian Central Bank (BCB) to Proceed with 50bp Interest Rate Cut Today Amidst Challenging External Environment

BRL: BCB to push ahead with 50bp cut today

Brazil’s central bank (BCB) meets to set rates today. Economists and investors are unanimous that, unlike Chile last week, the BCB will not be blown off course from its forward guidance. Here a 50bp cut has been well-telegraphed, which would take the selic policy rate to 12.25%. Since embarking on its easing cycle in August the BCB’s statement has consistently guided for 50bp cuts at future meetings. We would expect that phrasing to re-appear today.

However, market pricing now only looks for a 44bp cut at the December meeting and the depth of the 2024 easing cycle has been re-priced 125bp higher over recent months. This has largely been down to higher US yields and the strong dollar, but more recently has been a function of President Lula late last week questioning his government’s commitment to a zero budget deficit next year. The fiscal side has long been Brazil’s Achilles heel and the BCB has not been shy about emphasising fiscal risks in its statements.

We think the BCB will have to acknowledge the more difficult external environment. And that could see the BCB easing cycle priced a little shallower still. That could be seen as a mild Brazil real positive. Yet, fiscal risks look set to hold the real back and we much prefer exposure to the Mexican peso. Look for BRL/MXN to drop back to 3.50 later this year.

Brazilian Central Bank (BCB) to Proceed with 50bp Interest Rate Cut Today Amidst Challenging External Environment

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