Brazil’s inflation began decelerating in February and slowed down at a faster pace last month due to the strong base effect. Apart from seasonality, base effect is likely to help inflation decelerate in 2016, according to Societe Generale. Worsening of labor market and soft domestic demand are also expected to help inflation decelerate.
Even if the inflation is likely to decelerate in 2016, it is uncertain if the pace of slowdown will continue in 2017. This is expected to keep a lid on the prospect of considerable rate cuts, added Societe Generale. During the copom meeting tomorrow, the Central Bank of Brazil is expected to keep the Selic rate unchanged.
“We currently expect no rate cuts in 2016, followed by a 100bp rate cut in 2017 when the BCB sees inflation converging to its target range (between 3% and 6%)”, added Societe Generale.
The market expects the central bank to steeply lower its benchmark interest rate later in 2016 after inflation moderation. This scenario will possibly need inflation decelerating at a more rapid rate next year as compared to current estimate, noted Societe Generale. The projection of steep cuts in interest rates later this year is trivial due to constant rise in inflation expectations for end-2016 and end-2017. Furthermore, with t he fiscal stance, the Brazilian real is expected to be under pressure.
“We believe that the risk to the monetary policy stance this year remains balanced despite the inflation moderation and the continued decline in aggregate demand”, said Societe Generale.
