Brazil central bank cuts rates 25bps

Posted on December 1, 2016

Brazil’s central bank cut its benchmark Selic by 25 basis points on Wednesday evening, deciding against a sharper reduction in spite of an economy that is still deep in recession.

In a longer than usual statement, the central bank’s monetary policy committee said its decision to cut rates by the minimum amount to 13.75 per cent was driven by an external and internal environment that remained highly uncertain, reports Joe Leahy in São Paulo.

On the plus side, inflation was showing signs of moderating in Brazil, with expectations it would decline from nearly 8 per cent to close to the middle of the central bank’s target of 4.5 per cent plus or minus 2 percentage points by next year. Meanwhile, the new government of President Michel Temer was pushing through reforms to control fiscal spending faster than expected.

A 2.9 per cent contraction in gross domestic product in the third quarter compared with the earlier three-month period was another reason to ease monetary policy, the bank indicated.

In the US, however, the recent US election had raised the possibility of a normalisation of monetary conditions with the possible return of higher interest rates.

“The possible end of the benevolent interregnum for emerging markets could hamper the process of disinflation,” the statement said.

Most analyst agreed the overall tone of the note was dovish, indicating that the central bank might follow up in January with a 50 basis point cut.

Wrote Neil Shearing of Capital Economics:

Policymakers held off from stepping up the pace of easing but the accompanying statement suggests that bigger cuts could soon be on the way.

The statement notes that the economic recovery “may be more gradual than previously anticipated”, while the recent inflation data have been “more favourable than expected”. The BCB now forecasts inflation to drop to 4.7% in 2017 and 4.6% in 2018 in the “market scenario”, which assumes that the Selic moves in line with current market pricing.

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