Brazil Unexpectedly Cuts Rate by 50 Bps

The Central Bank of Brazil voted unanimously to lower its key Selic rate by 50bps to a record low of 6 percent during its July meeting, while markets had forecast a smaller 25bps cut. Policymakers said that the decision is consistent with the convergence of inflation to the target range and will continue to depend on the evolution of economic activity and the inflation outlook.

The Committee underscored that recent data on economic activity indicate weaker economic activity from previous quarters, and that risks of a global slowdown persist. Policymakers also mentioned as main inflationary risks in both directions slack capacity; frustrated expectations over structural reforms, and unfavorable external conditions in emerging markets. They judged that the decision is backed by lower-than-expected inflation and a deteriorated balance of risks since the previous meeting. The Copom reiterated that economic conditions prescribe stimulative monetary policy, i.e., interest rates below the structural level.

The central bank started its easing cycle in October of 2016 after the inflation rate eased from double digits. 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. It currently remains on target, as the annual inflation rate fell markedly to 3.37 percent in June (versus 4.66 percent in May).

The economic recovery is still taking longer than initially expected, with recent negative data. The Brazilian economy shrank 0.2 percent on quarter in the first quarter of 2019, slowing from a 0.1 percent expansion in the previous period and in line with market. It was the first contraction since the last quarter of 2016. Furthermore, the latest central bank’s Focus survey of market expectations (26 July 2019) pointed to lower GDP growth forecasts for 2019, now at 0.82 percent (vs 0.87 percent four weeks ago).

Brazil Unexpectedly Cuts Rate by 50 Bps

Mario |
8/1/2019 7:47:58 AM