Thought May 14, 2019 / 01:34 pm UTC

Brazil: No Rate Cut, Unless Inflation Expectations Take a Hit

By Pedro Tuesta

The Brazilian Central Bank's (BCB) dovishness on growth will not prompt additional monetary policy stimulus unless inflation expectations start to fall. However, we believe BRL weakness will keep this from happening. We therefore maintain our view that the Selic rate will remain unchanged until Q4 2020. 

The minutes of the May 8 Monetary Policy Committee meeting show that the BCB has accepted that growth will disappoint this year and the output gap will grow larger. However, the BCB did not change its outlook on inflation, in part because BRL weakness will support inflation expectations.

While the BCB acknowledged that the global backdrop has played a part in its downgraded GDP forecast, the Bank saw internal forces as the main reasons for the slowdown. First, events in 2018 impacted activity in Q1 2019. Second, uncertainty over reforms and fiscal policy is impacting the economic outlook. While the BCB does not explicitly mention that the current environment will impact 2020 growth, we believe the message is clear between lines. 

The BCB did not link the larger output gap to inflation. We believe this is due to BRL weakness from uncertainty, both internal and external. External issues include global deceleration, trade wars and monetary adjustment in major economies. The main internal issue is pension reform. 

We believe that these sources of uncertainty will not be removed for at least a quarter. We are aware that some may see the dovish view on growth as reason to bet on rate cuts but, given the described scenario, we are keeping our view that the BCB will not change the Selic rate until Q4 2020, when we expect a couple of hikes to reduce the size of the current monetary stimulus. 

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Analyst Certification
I, Pedro Tuesta, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.