BCB forced to hold rate amid EM rout

The Brazilian central bank held interest rate steady yesterday at odds with market expectations. Indeed, market participants expected that the BCB would keep going with its easing cycle by cutting the Selic rate by 25bps to 6.25%. Instead, the bank maintained the Selic at 6.50%. This surprise decision signalled that the institution has realised that the global outlook has become more uncertain, especially for emerging market.

Indeed, the Brazilian real had a rough month so far as it lost around 10% against the greenback, with USD/BRL hitting 3.6944 (the highest level since April 4th 2016) yesterday. Despite sound levels of inflation - 2.76%y/y in April - the currency weakness is casting a shadow on the price outlook as Brazil could start to import massively inflation (through its imports). Therefore, we think that the central will rather wait for the dust to settle before resuming its easing cycle. Regarding the Brazilian real, the current global environment – the Fed’s tightening cycle together with the geopolitical situation – does not allow for excess optimism.


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