Brazil Holds Interest Rate at 6.5%

The Central Bank of Brazil voted unanimously to hold its key Selic rate at a record low of 6.50 percent on February 6th 2019, as widely expected. Policymakers said that the decision reflects its baseline scenario for prospective inflation and its risks and it is consistent with the convergence of inflation to the target range.

Policymakers mentioned that while global volatility has ameliorated, risks persist in emerging economies, underscoring increase in risk aversion in global financial markets, with normalization of interest rates in some advanced economies, and with uncertainty regarding international trade policy. The central added the current economic scenario warrants loose monetary policy, with rates below neutral.

The central bank started its easing cycle in October of 2016 after the inflation rate eased from double digits. The annual inflation rate in Brazil dropped to 3.75 percent in December of 2018 from 4.05 percent in November, slightly above market expectations of 3.70 percent. It is the lowest inflation rate since May, as prices slowed mostly for food and fuels. The inflation rate finished 2018 within the central bank target of 4.5 percent plus or minus 1.5 percentage points and above 2.95 percent in 2017.

The economic recovery is still taking longer than initially expected, with recent mixed data. Brazil’s GDP expanded 0.8 percent on quarter in the third quarter of 2018, above a 0.2 percent rise in the previous period and in line with market expectations. It was the highest growth rate since the first quarter of 2017, mainly due to a rebound in investment and government spending. However, industrial output fell 3.6 percent year-on-year in December, following a 1.0 percent decline in the prior month.

The median estimate in the last central bank poll of economists (01 February 2019) currently points to growth of 2.50 percent for 2019 (vs 2.53 percent four weeks ago) and of 2.50 percent for 2020 (unchanged vs four weeks ago). Analysts expect the Selic rate to end 2019 at 6.50 percent (vs 7.00 percent) and rise to 8.0 percent in 2020 (unchanged).

Brazil Holds Interest Rate at 6.5%

Banco Central do Brasil | Mario |
2/7/2019 9:35:38 AM