Brazilian Real Holds Gains Agianst Majors After 100 BPS Rate Cut

Talking Points:

• Central Bank of Brazil cut benchmark lending rate 100bps to 10.25%, as expected
• The decision was made amid sluggish CPI growth and growing political uncertainty
• Timid reaction may have been a result of the news being released outside of trading hours

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The Brazilian real held gains against its major counterparts after the Central Bank of Brazil cut its benchmark lending rate 100 basis points to 10.25% as expected. The selic rate announcement crossed the wires outside of active trading hours for the Brazilian Real, perhaps contributing to the timid reaction. It won’t be until midnight Thursday that the markets will be able to fully digest the news flow.

While the reduction was in-line with analyst expectations, political risks and sluggish inflation still surround the country’s future with much uncertainty. Forecasts for Brazil’s CPI rate are set to come in at 3.5 percent in June, climbing slightly to 3.9 percent in December. Both figures remain below the country’s 4.5 percent target.

The probability that President Michel Tremer will face impeachment is seemingly rising, so there may be delays in the approval of any economic reforms. This political crisis also serves to dampen the fiscal outlook for the country which has the potential to cause exchange-rate depreciation, and further price shocks to short and long-term inflation estimates. These complications may keep Brazil’s central bank on its dovish path near-term. Tellingly, BI Economics has calculated the benchmark interest rate for Brazil to fall to 8.5 percent by the end of 2017.