Brazil Cuts Interest Rate to Fresh Record Low

The Central Bank of Brazil voted unanimously to trim its key Selic rate by 50bps to 5.50 percent during its September meeting, as widely expected. It is the second consecutive rate cut bringing borrowing costs to its lowest on record, amid the global economic slowdown and as key domestic reforms continue to move forward.
Banco Central do Brasil | Mario | mario@tradingeconomics.com 9/19/2019 10:13:53 AM
The Committee underscored that data on economic activity since the previous Copom meeting suggest resumption of the process of economic recovery. However, they expect this to occur at a gradual pace, and that risks of a global slowdown persist amid an uncertain outlook. Policymakers emphasizes that risks around its baseline scenario remain in both directions. On the one hand, the high level of economic slack may continue to produce lower-than-expected prospective inflation trajectory. Meanwhile, a possible frustration regarding the continuation of reforms and the perseverance in the necessary adjustments in the economy may affect risk premia and increase the path for inflation over the relevant horizon for the conduct of monetary policy. The Committee added that the decision reflects its baseline scenario for prospective inflation and the associated balance of risks, and it is consistent with convergence of inflation to target over the relevant horizon for the conduct of monetary policy. The Copom sees progress in the process of reforms and necessary adjustments in the economy, but emphasizes that persevering in this process is essential for the reduction of its structural interest rate and for sustainable economic recovery. Policymakers said that concrete progress in the reform agenda is fundamental for the consolidation of the benign scenario for prospective inflation.

The Copom deems that the consolidation of the benign scenario for prospective inflation should permit additional adjustment of the degree of stimulus. The Copom reiterates that communicating this assessment does not restrict its next decision, and emphasizes that the next steps in the conduct of monetary policy will continue to depend on the evolution of economic activity, the balance of risks, and on inflation projections and expectations.

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 rose modestly  to 3.43 percent in August (versus 3.22 percent in July). Inflation expectations for 2019, 2020, 2021, and 2022 collected by the Focus survey are around 3.5%, 3.8%, 3.75%, and 3.5%, respectively.

The recovery is still taking longer than initially expected, but the economy gained some steam in the second quarter. GDP expanded 1.0 percent year-on-year in the second quarter of 2019, following a 0.5 percent growth in the previous period and beating market consensus of 0.7 percent. The latest central bank’s Focus survey of market expectations (13 September) pointed slightly higher GDP growth forecasts for 2019, now at 0.87 percent (vs 0.83 percent four weeks ago).

Brazil Cuts Interest Rate to Fresh Record Low