Brazil Unexpectedly Holds Key Rate

The Central Bank of Brazil kept its key Selic rate unchanged at 6.50 percent on 16 May 2018 following a 25-bps slash on 21 March 2018. The hold, unanimously voted, surprised markets who expected a 25bps decline and ended eleven straight cuts, keeping borrowing costs at the lowest in modern history amid below-target inflation and a gradually improving economy, albeit recent setbacks.

Policymakers highlighted that inflation risks remained balanced in both directions, underscoring intensified financial turbulence in emerging markets since the last reunion. Regarding the next meetings, the Committee sees as adequate the maintenance of the interest rate at the current level, contrasting with an easing bias during the previous meeting.

The central bank started its easing cycle in October of 2016 after the inflation rate eased from double digits. Consumer prices increased to 2.76 percent year-on-year in April of 2018 from 2.68 percent in March and compared to market expectations of 2.82 percent. Considering the first four months of 2018, the cumulative inflation was 0.9 percent, the lowest for an April month since the real was implemented in 1994.

The economic recovery is still taking longer than initially expected, with some recent setbacks. The IBC-Br index of economic activity in Brazil shrank 0.74 percent month-over-month in March of 2018, after a revised 0.10 percent slump in February. It was the steepest decline in economic activity since December of 2016 (-0.78 percent). Year-on-year, the Brazilian economy contracted 0.66 percent on a non-seasonally adjusted basis, the most in near a year, after growing 0.51 percent in the previous month. Meanwhile, industrial output grew 1.30 percent year-on-year in March of 2018, following a downwardly revised 2.4 percent rise in February. It is the smallest gain in industrial output since June 2017 when it grew 0.8 percent.

The median estimate in the last central bank poll of economists (11 May 2018) currently points to growth of 2.51 percent for 2018 (vs 2.76 percent four weeks ago) and of 3.00 percent for 2019 (unchanged). Analysts expect the Selic rate to end 2018 at 6.25 percent (unchanged). 

Brazil Unexpectedly Holds Key Rate

Mario |
5/17/2018 3:31:24 PM