Sacha Tihanyi, deputy head of emerging markets strategy at TD Securities, suggests that with the Brazilian economy still underperforming, growth is unlikely to crack 1% this year.
“As inflation dynamics remain very repressed, particularly on the expectations front (3.6% on 1-year ahead measures), real rates continue to sit at low (though not historically low) levels. Given that real rates have been unable to ease further before the resumption of BCB rate cuts, we expect another 50bps in easing to take them down to around 2%.”
“We think the scope for rate easing has become more limited of late, as FX volatility is increasingly more of a concern for the BCB, hence the August spot market intervention when BRL was under severe pressure thanks to broad USD strength. Indeed the relative underperformance of BRL vs. fixed income has been notable since the outset of the BCB’s easing cycle.”
“We do not necessarily expect the BCB to address currency weakness as a concern in the statement, though it is possible. We do however think that we may see indications that the September meeting brings the final 50bp cut of the cycle.”