Brazil interest rates have risen nearly high enough for the current level of inflation acceleration (assuming inflation will subside substantially next year). Yet, the fact that these rate hikes have failed to cause a moderation in inflation reveals both the limitations of the monetary policy and the lack of support on fiscal and reform fronts. While the pressure on the BRL (the key medium-term factor affecting inflation) began as a result of a falling trade balance – thanks to lower commodity demand and prices – lower growth and fiscal balances perpetuated and heightened the pressure. As a result, higher interest rates have generally failed to protect the BRL. The possibility of renewed pressure on the BRL is significant and could well rise substantially with each bad fiscal print – including the one expected following tomorrow’s Copom meeting. The government’s inability to implement crucial reforms and, thereby convince the market and investors, could present fresh upside risks to both inflation forecasts in the medium term and the Selic rate in the near term.
The material has been provided by InstaForex Company – www.instaforex.com