BRL: Hawkish tilt and supported real – Commerzbank

Commerzbank analysts Michael Pfister and Norman Liebke highlight that Brazil’s inflation edged higher in February, and they expect today’s March data to show another fairly sharp rise in prices. Despite being at the beginning of its easing cycle, the Banco Central do Brasil (BCB) is signaling a more restrictive stance as inflation expectations continue to rise. While the analysts still foresee several rate cuts in the coming months, they note that the original rate path could be delayed. Consequently, the Brazilian Real (BRL) has benefited from this hawkish tilt and is likely to hold near current levels until the BCB's next policy steps become clearer.

BCB stance and real performance

"Today’s March data is likely to show another fairly sharp rise in prices (driven in part by energy prices). However, this is not quite as decisive for the year-over-year rate in Brazil, as strong base effects are also coming into play."

"Inflation rose from 3.8% to 4% in February, i.e. before the energy price shock, while core inflation increased slightly."

"Unlike in Mexico, the Brazilian Central Bank (BCB) is at the beginning of a rate-cutting cycle. Nevertheless, the latest meeting minutes suggest that the BCB will adopt a more restrictive stance, at least for the time being, as inflation expectations continue to rise."

"We still expect several rate cuts in the coming months, but given the rather hawkish minutes, the original rate path could shift slightly backward."

"The Brazilian real has also benefited in recent weeks due to the BCB’s more restrictive stance. Until the BCB’s next steps become clearer, the real is therefore likely to remain at this level."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)