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Weakness in the Brazilian real is likely to be a cause of concern for the central bank and as a result its statement is likely to refer to the risks for inflation, and it will signal its willingness to act should second round effects emerge. If the central bank were to hike interest rates after all in a surprise move today we doubt that BRL would be able to benefit on a sustainable basis, according to the latest report from Commerzbank.
The sudden significant price rise in June which was caused by supply shortages brought about by the lorry driver strike, was only a temporary phenomenon. As a result there is no need for the central bank to take urgent action.
The weakness of BRL has other causes than is the case with the Turkish lira for example. The problem is not inflation or a loss of confidence in the central bank but the ailing national finances that urgently require reform.
"Against this background the markets are nervously awaiting the Presidential elections in October. And there is little the central bank can do about that. As a result a wait and see approach seems the wisest strategy at present - also against the background of the disappointingly weak economic recovery," the report added.
