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Recent political events elevate uncertainties in Brazil

Maio 18, 2017

So far, the existence of a recording has only been confirmed by the news, and has not been released publicly.

Talk of the Day


According to a news piece published on the newspaper “O Globo”, President Michel Temer was recorded by a Brazilian businessman in negotiations involving bribes to ex-president of the Lower House Eduardo Cunha. So far, the existence of a recording has only been confirmed by the news, and has not been released publicly.

The core text of the Fiscal Recovery Regime that seeks to bring relief to highly indebted states in exchange for structural adjustments in fiscal accounts was approved in the Senate, with 56 votes in favor and 9 votes against.

In the opening remarks of IMF’s Regional Economic Outlook, released yesterday in BCB’s website, Governor Goldfajn said the authority is considering between keeping the current pace of easing or a “moderate intensification of the pace”. The monetary policy committee will consider the evolution of economic context as well as uncertainties and risk factors still present in the economy. Finally, he emphasized the board is still evaluating the appropriate degree of frontloading, adding “there is no definition at the moment, a decision will be only taken at the next Copom’s meeting”.

The BCB placed the full offering of 8,000 FX swaps. After closing, the central bank called a roll over auction of up to 8,000 contracts for today.


The central bank’s May analysts' survey shows a tick-up in inflation expectations at all horizons, complicating the continuation of aggressive rate cuts. Last month the central bank upped the easing pace by implementing a 50-bp rate cut amid growing activity concerns, falling inflation expectations and moderating headline inflation. The pick-up in inflation expectations could support the reversion to a more cautious rate cut pace of 25-bps at next week’s monetary policy meeting. The 2017 inflation expectation moved to 4.38% from 4.30% in the April survey. Meanwhile, the 2018 inflation expectations rose to 3.5% (3.4% previously). The 2-year horizon inflation expectation increased 3.31% from 3.21% last month. The core inflation expectation measure (excluding food prices) was broadly stable at 3.5% in 12 months and 3.07% in two years. The surveyed respondents expect a 25-bp rate cut next week, followed by consecutive cuts of the same magnitude until the policy rate reaches 5.5% in August, thereafter pausing until February 2018, before taking the rate to 5.0% by April next year.
We also expect the policy rate to end the year at 5.50%, with further easing to 4.5% next year. We expect the pace of rate cuts to remain data dependent. Still weak confidence, low growth and declining headline inflation will be arguments for larger rate cuts next week, however, the sticky non-tradable inflation and the latest reversion of inflation expectations will likely motivate some caution.


Central bank President Federico Sturzenegger made some remarks on monetary policy in the presentation of the financial stability report.

Federico Sturzenegger recognized that the overconfidence generated by the lower inflation readings in December 2016 and January 2017 led the institution to ease monetary policy somewhat early in the year. The central bank clearly stated its commitment to pursue a (tight) monetary policy consistent with further disinflation. Sturzenegger believes that an ex-ante real interest rate of around 4%-5% is enough to ensure the disinflation process. (The current policy rate is at 26.25%, while the expected inflation is 21% for this year and 18% for the next 12 months).

The central bank started to tighten again the monetary policy in March. First it noted that the challenging inflation outlook for the period from February to April. The central bank then began to intervene in the secondary market by raising the yield of the short-term sterilization bills (Lebacs) to a level consistent with the range set for the reference rate (7-day repo rate). Finally, the CB increased the reference rate by 125 bps, to 26.25%, in early April.

The disinflation process resumed in May. Sturzenegger reaffirmed the 12%-17% inflation target for 2017 and added that the monetary authority is working to meet it. He also noted that it is crucial to reduce monthly inflation to 1% or less by yearend in order to put inflation on a consistent level for the 2018 range target of 8%-12%.

The central bank reference rate decision is scheduled for next week. The latest statement kept the tightening bias introduced in April, reiterating its willingness to act (again) if necessary.


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