To Brazil Traders, Rousseff Ouster May Be Boon to Central Bank

  • Soaring Brazil currency has helped curb inflation expectations
  • Congress to vote on Rousseff impeachment later this week

Traders are betting the push to oust President Dilma Rousseff will make it easier for Brazil’s central bank to quell inflation.

The real has soared 13 percent this year, the most among major currencies, as Congress moves closer to impeaching Rousseff. The appreciation is poised to make imports less expensive, prompting analysts surveyed by the central bank to lower their expectations for cost-of-living increases this year and next. It has also led swaps traders to wager that policy makers will chop rates by 1 percentage point this year.

“If the real stays at the current levels, that would allow a quicker disinflation and help the central bank’s task in controlling inflation,” said Carlos Kawall, chief economist at Banco Safra. “Inflation expectations are already going down due to those new levels.”

QuickTake Brazil's Ups and Downs

The central bank, led by Alexandre Tombini, missed its inflation target last year as the growing political crisis prevented the government from passing measures needed to fix its finances and pull the country out of recession. Investors are betting Rousseff’s removal from office will pave the way for a government that can do both. On Monday, a lower house committee voted in favor of Rousseff’s impeachment by a wider margin than originally forecast, setting the stage for a showdown when the full house convenes as early as Sunday to decide on the matter.

On Tuesday, Rousseff accused her vice president, Michel Temer, of attempting to illegally overthrow the government, underscoring the depth of the bitterness convulsing the country days before an impeachment vote.

The central bank declined to comment on market expectations. Brazil’s real fell 1.4 percent Wednesday to 3.5394 per dollar at 12:18 p.m. in New York.

The central bank has boosted rates to an almost 10-year high of 14.25 percent to quash inflation, which slowed to 9.39 percent in March. The central bank targets price increases of 4.5 percent.

“The crisis is fiscal and politics play a part in that,” said Luciano Rostagno, chief strategist at Banco Mizuho do Brasil SA. “There is nothing more for Tombini to do at this moment.”

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