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Commerzbank Say BCB Credibility Unlikely To Be Compromised

BRAZIL
  • Commerzbank note the BCB has left no doubt that it is in a rate-cutting cycle for the time being, and a 50bp cut is seen as a foregone conclusion. The Fed's rate decision and its impact on the dollar is likely to be the more important event for the USDBRL outlook.
  • Fundamentally, however, the real continues to benefit from the high real interest rate and hopes for a soft landing remain. Whether these hopes are justified, however, is likely to depend heavily on how the BCB manages to adjust its still very restrictive monetary policy. After today's rate cut, the real interest rate would still be above 8%, which is likely to weigh on economic momentum for some time to come. At the same time, inflation remains stubbornly above the inflation target, which is why a too rapid easing would not be appropriate either.
  • The example of the BCB shows that even after the end of the rate-hike cycle, monetary policy remains a balancing act and the key determinant of the currency outlook. The BRL is benefiting from the high credibility that the BCB has earned through early and decisive rate hikes, even in the face of government resistance.
  • In Commerzbank’s view, this credibility is unlikely to be compromised in the near future, and they therefore expect a cautious easing cycle. In their view, the BRL is therefore rightly one of this year's outperformers.
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