BCB likely to go for a 50bp rate cut in 2016

There has been no substantial change in the macro economy since earlier this month. However, the sharp deterioration in financial conditions, amid mounting domestic political and legislative concerns and the poor macroeconomic situation, forced the BCB to come out in support of the BRL with some direct actions, including using the FX reserves and indirect assurances. 

The most crucial is the pledge to keep rates high for as long as needed. The BCB President's assurance confirms the view that the end of tightening did not mean the end of upside risk to policy rate forecasts. In fact, one cannot rule out further monetary tightening in this cycle given the pressure on the BRL, although that is not our baseline scenario. 

"However, such a rate hike could be to ensure financial stability and not primarily due to further inflationary pressure. A rate cut of only 50bp is now expected in 2016, vs a 125bp rate cut previously. The consensus view of a rate cut of about 175bp in 2016 is probably too optimistic", says Societe Generale.