to Indonesia that are lowering borrowing costs as global activity slows. Local policymakers are rushing to the aid of an economy that’s expected to grow less than 1% this year amid headwinds including high unemployment, low confidence and weak investments.
The dovish message should put pressure on the Brazilian real, as further rate cuts reduce the currency’s attractiveness for the carry trade. Local rates should also see a downward adjustment to price in a more aggressive easing cycle, according to Brendan McKenna, a currency strategist at Wells Fargo in New York.
“Markets were really only prepared for a 25-bps cut and then a more patient BCB,” McKenna said. “A 50-bps cut with an intention for easing more is probably going to put pressure on BRL and push yields lower.”Still, policymakers maintained a degree of caution in their comments. Aside from not explicitly committing themselves to more rate cuts, they warned that frustration of expectations over Brazil’s economic reforms could drive inflation higher.
A crucial pension overhaul that seeks to save government coffers some 900 billion reais in a decade will be put to a second-floor vote in the lower house in August before moving to the Senate. Lower house Speaker Rodrigo Maia said on Twitter that the central bank’s rate cut was facilitated by the bill’s advance through Congress.
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