Economic Analysis - Rapid Disinflation Supports Single-Digit Interest Rates - MAY 2017

BMI View : The Banco Central do Brasil will aggressively cut interest rates over the coming quarters, as inflation falls below target amid persistently weak economic activity.

The Banco Central do Brasil (BCB) will cut its benchmark interest rate to single digits by end-2017 in light of rapidly falling inflation. We expect an additional 275 basis points (bps) of rate cuts will bring the Selic rate to 9.50%, from 12.25% currently. While we have long expected an aggressive rate cutting cycle in 2017, we have downgraded our end-year forecast from 10.75% as disinflation has proceeded more rapidly than anticipated ( see 'Sharper Rate Cuts As Inflation Falls And Growth Drags', January 5).

Inflation will likely fall below the BCB's 4.5% y-o-y target in the coming months. Receding food price pressures, subdued oil prices, a stronger currency and weak domestic demand will continue to keep price growth at relatively low levels. March mid-month inflation fell to 4.7% y-o-y, from 5.0% in February, and we expect inflation to fall as low as 3.4% y-o-y in Q317, when inflationary pressures are historically at their lowest. We see inflation picking up in Q417, ending the year at 4.9% y-o-y while averaging 4.2%, less than half the 2016 average of 8.8%.

More Cuts To Come As Inflation Plunges
Brazil - Selic Target Rate & Inflation
Source: BCB, BMI

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