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According to analysts from Rabobank, the minutes of the latest meeting of the Central Bank of Brazil (BCB) shows that it plans to keep interests rates steady as long as the exchange rate does not threat the inflation outlook, taking into account the recent depreciation.

Key Quotes:

“The Brazilian Central Bank (BCB) has published the minutes from last week’s Copom policy meeting, where the authority kept the (Selic) policy rate on hold at 6.50% (a historical low). In our view, the tone of the authority was balanced, which is in line with the forward guidance of stable policy rate ahead, given the current inflation outlook, balance of risks. For now, the authority sees a comfortable level of inflation projections, standing at 4% for both 2018YE and 2019YE in the “benchmark” simulations (i.e. with Selic rate at 6.50%, USD/BRL at 3.60).”

“The authority has once again stressed on the fact that the policy focus is only on eventual second-round effects from the weaker FX on the inflation outlook. On that note, the BCB sees the intensity of the inflationary impact from a weaker BRL as conditional economic slacks and the anchoring of inflation expectations. Thus, a natural conclusion is that the BCB seems to expect moderate price pressures for the time being.”

“Assuming an electoral scenario that strengthens expectations about fiscal reforms in 2019, and considering an accommodation in the pressures/volatility from global financial conditions, we continue to envision a scenario of low interest rate for long, with a full policy normalization (i.e. interest rate back to neutral, around 8%) only in 2020.”

“Amid a soft activity recovery, the most likely scenario continues to be one with low interest rate for quite a long time, in a scenario assuming approval of fiscal reforms in 2019. In fact, we maintain our call that the normalization of the monetary policy stance – i.e. hikes towards a neutral level (assumed at 8.0%) – is about to be completed only in 2020, whereas consensus still predicts a full neutralization of the policy stance already in 2019.”