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Forex Flash: Tightening in Brazil will likely be more gradual - BBH

Ilan Solot, Emerging Markets Strategist at Brown Brothers Harriman suspects that tightening in Brazil will likely be more of a gradual process.

He begins by noting that dovish minutes and new tax measure mean that hikes in Brazil will be more gradual and he still thinks that the most logical strategy would be to front load hikes and try to hike the least possible, but that doesn’t look like the strategy being pursued. The central government has decided to take a greater responsibility for containing inflation and Solot feels that it is expected to announce new tax cuts on May 1 (fuel, public transportation and payroll taxes). The cost, of course, will show up on the fiscal side – but he asks, why worry about such unpleasant thoughts? He finishes by writing, “Aside from improving inflation expectations in the near term, the measures will also help support President Dilma’s still very high popularity into the 2014 elections. As usual, we will wait until closer to the April COPOM meeting before committing to a view on rates, but a more gradual approach now seem more likely now.”

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