Brazil cuts interest rates for first time in 4 years

Posted on October 20, 2016

Brazil’s central bank has cut interest rates for the first time in four years as the country struggles to emerge from its deepest recession on record.

The monetary policy committee cut the benchmark Selic rate late on Wednesday by 25 basis points to 14 per cent from a near-decade high of 14.25 per cent.

Most analysts expected the central bank to kick off the country’s first monetary easing cycle since 2012 this week but they had been divided over the size of the cut, with some predicting a more aggressive 50 basis point reduction.

For the past year Brazil’s central bank has been forced to keep rates on hold as the country battled with a toxic combination of soaring inflation and a shrinking economy.

However, easing price pressures over recent months and greater confidence in Brazil’s new market-friendly government have helped pave the way for interest rate cuts.

In its accompanying statement on Wednesday, the central bank pointed to falling food prices but sought to rein in investors’ expectations, warning that any further cuts will depend on favourable inflation data and the government’s progress in passing ambitious fiscal reforms.

As well as trying to freeze budget spending in real terms for the next two decades, President Michel Temer has also promised to pass unpopular reforms to Brazil’s bloated pension system.

“[The central bank] adjusted the forward guidance, pouring cold water on the expectation of a deep front-loaded easing cycle,” said Alberto Ramos, economist at Goldman Sachs.

Wednesday’s interest rate cut comes as the rest of the region looks to expansionary monetary policy to boost growth following the end of the global commodity boom. While Argentina has started aggressively cutting borrowing costs, pressure is growing in Chile and Colombia to follow suit.

However, in Brazil, the political risks ahead are particularly high. Only a few hours before the central bank published its decision, police arrested Eduardo Cunha, the powerful former head of Brazil’s lower house, in a move that has raised concerns about the viability of Mr Temer’s pension reform next year.

Mr Cunha is facing charges that he took bribes as part of the corruption scandal at state oil company Petrobras dubbed Lava Jato [Car Wash] by investigators — accusations he denies.

If Mr Cunha, who masterminded the impeachment of former president Dilma Rousseff this year, signs a plea bargain implicating members of Mr Temer’s government, it will make it harder to garner congressional support for the reforms, analysts said.

“[Mr Cunha’s arrest] serves as an important reminder that the ongoing Lava Jato probe remains the key risk for Temer and the “X” factor on the political landscape,” said Christopher Garman at Eurasia Group, the consultancy.

You must be logged in to post a comment Login