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Continued Brazil GDP Slump Threatens further Rate Cuts, Real Slide

Continued Brazil GDP Slump Threatens further Rate Cuts, Real Slide

Oliver Morrison, Analyst

Talking Points:

Brazil's GDP shrank 0.8% in the third quarter, matching forecasts

• The country’s prolonged recession – now 8 quarters long – could become the worst in its history

• The central bank is widely expected to cut interest rates a further 25 basis points this week

Brazil's economy shrank 0.8% in the third quarter, statistics agency IBGE reported on Wednesday. Growth was down a seasonally adjusted 2.9% compared to the third quarter of 2015.

The data are not as extreme as economists forecasted, but still hammer home the fact that Brazil remains in its worst recession of modern times. The government had hoped a rise in consumer and business confidence after the impeachment of former president Dilma Rousseff would lead Brazil out of its economic funk. But a persistent weakness in spending by both critical groups remains.

Government and economists have cut growth targets for next year to around 1%. Some warn that Brazil will experience another year of recession in 2017, which would mark the worst ever slump in Latin America’s largest economy.

All of this means that the country’s central bank, the Banc Central do Brasil, is widely expected to cut interest rates by a further 25 basis points to 13.75% when it meets later the same day. It had cut rates for the first time in four years to 14% in October in an attempt to boost growth amid signs of slowing inflation.

Another rate cut will put further pressure on Brazil’s currency, the real, which has already been a big loser since Donald Trump won the US Presidential election earlier this month. His unexpected triumph spells trouble for emerging markets such as Brazil, as concerns about Trump’s protectionist policies weigh on emerging-market assets. Trump’s ‘America First’ policies may in turn mean a quicker pace of monetary tightening by the Federal Reserve. Indeed, the markets reckon there’s a 100% chance the Fed will raise US rates at its next meeting on December 14.

USD/BRL made its highest gain since June in the aftermath of the Trump victory, rising to as high as 3.4478. The pair has since dropped a little to trade at 3.3970.

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