Brazil Holds Interest Rate at 6.50%

The Central Bank of Brazil voted unanimously to hold its key Selic rate at 6.50 percent on 31 October 2018 as widely expected, keeping borrowing costs at the lowest level in modern history amid target inflation and lackluster GDP growth. It was the first monetary policy meeting after the presidential election.

Policymakers underscored that 1) recent indicators of economic activity point to recovery of the Brazilian economy, at a more gradual pace than envisaged early this year; 2) the global outlook remains challenging, with reduction of risk appetite towards emerging economies, and 3) various measures of underlying inflation are running at appropriate levels.

The central bank started its easing cycle in October of 2016 after the inflation rate eased from double digits. The annual inflation rate increased to 4.53 percent in September of 2018 from 4.19 percent in August, above market expectations of 4.45 percent. It is the highest inflation rate since March of 2017, mainly driven by higher oil and food prices and reaching the midpoint of the central bank's target range of 4.5 percent +/- 1.5 percent.

The economic recovery is still taking longer than initially expected, with recent data affected by strikes. GDP expanded 1.0 percent year-on-year in Q2, easing from a 1.2 percent rise in the previous quarter and missing market expectations of a 1.1 percent increase. It was the slowest expansion since the second quarter of 2017. Meantime, industrial production in Brazil advanced 2 percent year-on-year in August 2018, following an upwardly revised 4.2 percent surge in the prior month and missing market consensus of a 3.2 percent gain. Year-to-date, industrial activity went up 2.5 percent over a year ago.

The median estimate in the last central bank poll of economists (26 Octubre 2018) currently points to growth of 1.36 percent for 2018 (vs 1.35 percent four weeks ago) and of 2.50 percent for 2019 (unchanged). Analysts expect the Selic rate to end 2018 at 6.50 percent (unchanged) and 8.00 for 2019 (unchanged).

Brazil Holds Interest Rate at 6.50%

Mario |
10/31/2018 9:15:23 PM