Background

Brazil’s economy has been caught in a harmful cycle of stagflation since a slowdown in China ended the global commodity boom.

The IMF projects that the Brazilian economy will shrink by 3.5% this year. It registered a contraction of 3.8% over 2015.

The Brazilian economy has been in a state of recession since 2014. Unemployment reached 8.5% in 2015, up from 6.8% in 2014.

Recent political uncertainty has been hurting the real as well. The currency slumped four percent one news of former president Lula’s appointment to the cabinet. HSBC is predicting that the currency’s recent rally will reverse itself and that the real will fall 15% by mid-2016.

A lower real would fuel even more inflation, which has been a persistent problem for the Rousseff administration. According to the Wall Street Journal, Brazil’s consumer-price index rose 10.36% through the past 12 months. Yet in a rare bit of good economic news, February’s increase came in below expectation at just 0.9%, down from 1.27% in January.

Relief on the inflation front is fueling bets on an interest rate cut in the near future. Brazil’s central bank rate currently stands at a nine-year high of 14.25%. Clearly there’s a lot of room to move towards a more accommodative monetary policy if inflation is brought under control.