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Emerging Markets

Fiscal slippage and Lula’s frustration: Why Brazil’s central bank has paused cuts and what to expect

The Brazilian central bank will keep policy on hold for the rest of the year as a combination of sticky inflation, fiscal concerns and economic resilience reduces the scope for rate cuts in the near term. However, we expect it to resume easing in 2025, as fiscal consolidation takes place and inflation concerns fade.

Author
Michael Langham
Emerging Markets Economist

Duration: 1 Min

Date: Aug 01, 2024

Key Takeaways

  • A combination of fiscal slippage, economic resilience and rising inflation expectations has increased the upside risks to the inflation outlook, leading the Brazilian central bank (BCB) to pause its cutting cycle and keep its policy rate at 10.50% since June.
  • We expect the pause to continue through the rest of the year, as the BCB looks to ensure that Brazil’s inflation doesn’t reaccelerate. 
  • Indeed, we expect inflation to be slow to reach the BCB’s 3% target mid-point on a sustained basis, averaging 4.2% in 2024 and 3.5% in 2025. 
  • However, a shift towards modest fiscal consolidation in the second half of 2024, along with still restrictive monetary conditions, will weigh on activity and ensure inflation remains broadly within the 3% +/-1.5ppts target band.
  • With the US Federal Reserve set to begin its easing cycle in September, we think the BCB should have scope to resume cuts in 2025, taking the policy rate to 9.75% by year end.
  • However, risks are skewed towards tighter policy. Renewed fiscal concerns in 2025 and an erosion of BCB independence could lead to investors becoming increasing concerned about the inflation outlook with the BCB then having to keep policy more restrictive. 

    Read the full article. 

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