BCB unlikely to begin easing monetary policy before end-2016

Brazilian inflation last year skyrocketed along with the depreciation of the Brazilian real. By the beginning of this year, the consumer price index levels reached a high of around 10.7 percent year-on-year. This is quite above the Brazilian central bank’s 4.5 percent inflation target.

Since then, inflation figures have dropped noticeably. The central bank expects the appreciation of the real since the beginning of 2016 and higher unemployment to curb inflationary pressures. But inflation is unlikely to reach the target rate of 4.5 percent before late 2017, according Commerzbank.

Meanwhile, in late July 2015, the Central Bank of Brazil hiked its key interest rate by 50 basis points to 14.25 percent. This was the last time the central bank raised rates. Therefore, the country displays considerably positive real interest rates. The central bank intends to maintain interest rates at the present level for the near future in order to avert losing the investor confidence and thus underpinning the recovery of Brazilian real, stated Commerzbank.

Once it is evident that the political uncertainty is easing and the Termer government can show that its reforms are working, the central bank is expected to consider easing monetary policy. But this is unlikely to take place before the end of 2016, added Commerzbank. A further slowdown in inflation is a major requirement for this.