Reform progress paves way for Brazil rates to hit a new low

Expectations that Brazil’s central bank will soon embark on an aggressive interest rate-cutting cycle gathered momentum, after a measure of annual inflation fell to its lowest in over a year in mid July.

Economists at Bank of America Merrill Lynch slashed their end-year forecast for the benchmark Selic rate to 4.75%, Goldman Sachs said the easing cycle will start now, and Capital Economics said the mid-month inflation print for July «surely seals the deal» on a rate cut very soon.

The IPCA measure of mid-month inflation fell to 3.27% in July from 3.84% in June, lower than economists had expected and the lowest since May last year.

Economists at BAML, already among the most dovish on Brazil’s rate outlook, now expect the Selic rate to be cut to a new low of 4.75% this year compared with their previous call of 5.50%, starting with a 50 basis point reduction by the mid of July.

In a note to clients, they said a global shift towards a more dovish policy stance among central banks, concrete progress on Brazilian pension reform approval, structurally weak inflation and disappointing growth all point to substantially lower rates.

They also lowered their 2019 economic growth forecast to 0.7% from 1.2% and next year’s projection to 1.9% from 2.2%.

The Selic has been held at a record low of 6.50% for well over a year, but possibly not for much longer.

«We believe Copom will initiate a moderate easing cycle at the July 31 meeting. We expect 100 bps of rate cuts before the end of the year,» said Alberto Ramos, head of Latin American research at Goldman Sachs in New York.

Interest rate futures markets are pricing in around 100 basis points of easing over the next year.

On July 23rd, the International Monetary Fund slashed its outlook for Brazil’s gross domestic product growth this year to 0.8% from 2.1%, in line with the government, central bank and market consensus.

Original Story:Reuters | Jamie McGeever
Photo: São Paulo /Brazil
Edition: Prime Yield