Further progress on fiscal reformsgives Brazil moreroom to cut rates:

After having made it through each voting round in the Lower House successfully, the spending cap bill – which aims at limiting increases in government spending to inflation for the next 20 years – was approved in the first instance in the Senate lastnight. The second and final round is expected to take place in December, after which the government intends on unveiling the initial contour of pension reform before year-end. Positive strides in much-needed reforms are welcome, but digging deeper into more socially-sensitive issues such as pensions will likely require a greater and more coordinated effort by the government. This is especially true in an environment where public disillusionment and distrusthave increased on the back of consistently subdued economic growth and substantial political fallout from the Lava Jato investigations. In any case, we believe that the government is committed to austerity measures and will be able to gradually tighten fiscal policy to help mitigate Brazil’s increasing debt burden, lower inflation,and provide the conditions for a recovery in consumer and business sentiment. With regards to monetary policy, we expect the BCB to lower rates by 25bp in its COPOM meeting later today, in line with consensus and market pricing