Brazil Holds Interest Rate as Expected
The Central Bank of Brazil kept its key Selic rate unchanged at 6.50 percent on 20 June 2018 following no change on 16 May 2018. The hold, unanimously voted, matched market expectations and was the second hold after eleven straight cuts, keeping borrowing costs at the lowest in modern history amid below-target inflation and a gradually improving economy, albeit recent mixed data.
6/20/2018 9:10:51 PM
Policymakers highlighted the temporary halt in the transportation sector in May makes it more difficult to assess the recent evolution of economic activity. They also underscored a challenging and volatile global outlook. Regarding the next meetings, the Committee emphasized that risks around its baseline scenario remain in both directions and reiterated that economic conditions prescribe accommodative monetary policy.
The central bank started its easing cycle in October of 2016 after the inflation rate eased from double digits. Consumer prices increased 2.86 percent year-on-year in May 2018 from 2.76 percent in April, against market expectations of a small decrease to 2.74 percent. It was the highest inflation rate since January, mainly due to rising prices of transport, namely fuels such as gasoline and diesel.
The economic recovery is still taking longer than initially expected, with recent mixed data. The IBC-Br index of economic activity in Brazil rose 0.46 percent month-over-month in April of 2018, compared to a downwardly revised 0.51 percent contraction in March. It was the first expansion after three consecutive declines. Year-on-year, the Brazilian economy advanced 3.70 percent on a non-seasonally adjusted basis, after shrinking 0.55 percent in March. Meanwhile, industrial output grew 8.9 percent year-on-year in April 2018, the most since April 2013, compared to a downwardly revised 1.2 percent gain in March and market consensus of a 7.7 percent surge.
The median estimate in the last central bank poll of economists (15 June 2018) currently points to growth of 1.76 percent for 2018 (vs 2.50 percent four weeks ago) and of 2.70 percent for 2019 (vs 3.00 percent). Analysts expect the Selic rate to end 2018 at 6.50 percent (+25 bps).