Monetary policy will be less supportive of the Real – Commerzbank

The Brazilian central bank (Banco Central do Brasil, BCB) decided to cut 50 bps off its benchmark rate to 13.25%. Economists at Commerzbank analyze Real (BRL) outlook after the Interest Rate Decision.

BCB cuts key interest rate by 50 bps

The BCB kicked off its rate-cutting cycle on Wednesday with a larger-than-expected 50 bps cut in its benchmark rate to 13.25. The larger move increases our fears that the BCB may now be acting more dovishly, especially with further 50 bps cuts on the horizon. However, these concerns will be more relevant in the future.

Currently, the inflation trajectory is in line with reaching the target on a sustainable basis in 2025, which could justify these faster rate cuts, given the still restrictive (real) interest rate level, which therefore should not weigh excessively on the BRL. However, it will be crucial to see how the BCB’s central bankers react to a change in the inflationary environment. We suspect that monetary policy will be less supportive of the Real in the future than it has been in recent times.