beyondbrics

It’s what millions of Brazilian shoppers have been longing for. Brazil’s interest rate, one of the highest in the world, may finally be cut at the central bank’s next meeting on Wednesday.

All economists polled recently by Reuters had expected the central bank to hold the country’s benchmark interest rate at 12.5 per cent - a 30-month high.

But Monday’s announcement of spending curbs is starting to change people’s minds. The government raised the primary surplus target this year by R$10bn ($6.3bn), promising to limit future spending and give the central bank room to cut rates.

While economists are still forecasting no change to the benchmark Selic rate, Brazil’s interest rate futures market on Monday was starting to price in a 25 basis point cut.

However, maybe these traders are getting ahead of themselves. Yes, recent concerns over global growth are likely to knock down commodity prices but it’s still very early to judge exactly what effect this will have on Brazil’s growth.

Cutting interest rates while inflation is technically still running above target may also prove a little too risky for the conservative folks at the central bank.

Month-on-month inflation has shown signs of easing recently, but the 12-month rate was last recorded at 7.1 per cent, well above the 6.5 per cent upper limit of the central bank’s official target.

With unemployment near record lows, the labour market also remains extremely tight, giving workers more bargaining power to push salaries higher. Perhaps Brazil’s credit-hungry shoppers will have to wait until the central bank’s next meeting in October after all.

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Brazil: “What do we want? A rate cut. When do we want it? Now!”, beyondbrics