Brazil cuts rates, “earnings upgrades will follow”

Brazil took the widely expected move of cutting its interest rates yesterday after a large fall in inflation, but the cut was smaller than expected and central bankers are expected to remain dovish.

The country has been in recession for three years and larger rate cuts are expected.

Ian Simmons, portfolio manager of the Charlemagne Magna Latin American Fund at Charlemagne Capital UK, said: “Although the 1% rate cut was widely expected it is nonetheless confirmation that the central bank is confident current inflation levels are here to stay. The big question now is how far they will go, with some market participants looking for additional cuts close to 8%.”

Inflation has fallen over the past year from 10.7% in January 2016 to 4.6% in March this year.

Brazil began easing last year and the headline rate is now 11.25%. Rates are 3% lower than in October 2016, but the country still sees below-trend growth.

Simmons added: “We believe the next leg of market performance will come from domestic growth stories which are only now beginning to see an inflection point in customer activity after a three year recession. Earnings upgrades will follow.”

Another rate decrease seems likely in May after the monetary policy committee agreed unanimously to yesterday’s cut, said Schroders’ emerging markets economist, Craig Botham. 

He said a large cut was “always on the table given how drastically inflation has fallen over the past year”.

“With an upper inflation target of 6.5%, an economy clearly operating far below trend growth, and rates in the double digits, the speculation was that, if anything, further acceleration in the cutting cycle might be on the cards.”

He said that despite improvements in domestic indicators such as retail sales, Brazil’s monetary policy committee remains concerned about uncertainty on global growth and commodity prices.

“This is an important factor for Brazilian exports – though Brazil  is not a heavily-trade dependent emerging market economy,” said Botham, adding that another 1% cut seems likely in May and a reduction in the pace of easing may be hinted at then.

“However, given our own view that we could see global activity face greater headwinds in the second half of the year, the caution expressed over global growth may keep the central bank slightly more dovish for longer.”

©2017 funds europe

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