Brazil's central bank (Banco Central do Brasil, BCB) is ahead of rate cuts. Economists at Commerzbank analyze BRL outlook.

A less hawkish monetary policy could prove to be a drag on the BRL next year

Today's BCB decision is widely expected to result in a rate cut. The big question is whether the interest rate will be cut by 25 bps or 50 bps. Although the latter is seen as more likely by the market, it would certainly be the more dovish signal that could weigh more heavily on the BRL. However, the new inflation forecasts are likely to have a greater impact on the expected overall size of future rate cuts.

We expect the BCB to emphasize a prudent approach in its accompanying statement and to leave no doubt that it will react promptly to any upside risks to inflation. Its track record gives it a high degree of credibility, which is why we expect the Real to trade at strong levels against the USD for the time being, below 5.00 in USD/BRL terms.

The most interesting question is whether the statement will reflect a possible more dovish signature of the two central bankers newly appointed by President Lula da Silva, Gabriel Galipoli and Ailton Aquino. Because I still fear that a less hawkish monetary policy after the end of BCB Governor Roberto Campos Neto's term in December 2024 could prove to be a drag on the BRL next year