Economists at Commerzbank discuss BCB’s policy outlook and its implications for the USD/BRL pair after yesterday’s inflation figures.

Interest rate cuts in Brazil getting closer

“Yesterday's weaker-than-expected inflation data for mid-May boosted expectations of a rate cut in Brazil and weakened the real. We also see room for a rate cut.”

“Critically, the government continues to call for interest rate cuts. In order to maintain credibility in the market and ensure the stability of the BRL, the Brazilian central bank must make it clear that rate cuts, if they come, are fundamentally justified and not the result of pressure from the government.”

“We expect the BCB to initiate the rate cut cycle cautiously in order to avoid speculation about government influence. Accordingly, the Real depreciated yesterday, but is still trading at high levels against the US Dollar. We see confirmation of our view that the lows for USD/BRL are in the 4.90-5.00 range.”