Brazilian Central Bank Opens Door to Cut Rates Without Advancing on Fiscal Adjustment

09/28/2016 - 11h32

After linking the cut in the basic interest rate to the progress of reforms in the fiscal area and fall in inflation, the Brazilian Central Bank has changed its tune to indicate that interest rates will fall further this year, even with little progress in these areas.

Financial market analysts expect the first cut to be decided at the October 19 meeting of the bank's monetary policy committee, known as Copom.

On Tuesday (27), the institution released one of its most important documents, the Quarterly Inflation Report, which analyzes the economic environment, the behavior of inflation and its projections for the coming years.

According to the Central Bank, inflation could reach 4.4% next year, slightly below the official target of 4.5%, if the benchmark interest rate stays at current 14.25% per annum.

In this scenario, inflation would fall to 3.8% in 2018. According to the Central Bank forecast, if interest rates fall to 11% by the end of 2017, as expected by the market, and the dollar does not exceed R$ 3.50, it would be possible to keep inflation under 5% next year and at 4.5% in 2018. Situation the report considered acceptable.

Despite reaffirming its promise to drop inflation from the current 9% to 4.5% by the end of 2017, the Central Bank says it also needs to look at longer periods, a sign that it may allow a bit higher rate of inflation next year.

Read the article in the original language