Economic Analysis - Cyclical Disinflation Set To Fade In Q417 - AUG 2017

BMI View : The Banco Central do Brasil is nearing the end of its rate cutting cycle, as inflation is likely to trend higher in Q417. After 350 basis points of rate cuts in H11 7 , an additional 150bps of cuts will bring the benchmark Selic rate to 8.75% by end-2017.

The Banco Central do Brasil (BCB) will ease the pace of rate cuts in H217 as inflation bottoms out and begins to rise. A seasonal rise in inflation will be underpinned by higher oil prices and a narrowing output gap. Additionally, BCB policymakers will be concerned by the efficacy of pension reforms, which are likely to under-deliver promised fiscal savings in light of political instability and thus reduce expectations for structurally lower inflation over the coming years.

We expect two 75 basis points (bps) cuts over the four policy meetings scheduled for the rest of the year to bring the benchmark Selic rate to 8.75% by end-2017, from 10.25% currently. This represents a tempering of the 100bps cuts enacted in April and May, and a downward revision of our previous forecast of 9.50% ( see ' Rapid Disinflation Supports Single-Digit Interest Rates ' , March 24).

Rates Headed To Single Digits
Brazil - Selic Target Rate & Inflation
Source: IBGE, BCB, BMI

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