Brazilian Rate Cut Yesterday Perhaps the Last of Nine

August 30, 2012

A ninth Selic rate reduction of the cycle was implemented on Wednesday but accompanied with a statement that suggests it may be the final one.  The Selic rate drops to a record low of 7.5% versus 12.5% that prevailed in August 2011.  Seven of the cuts during the past year were by 50 basis points.  Those in March and April of this year were by 75 bps. 

Yesterday’s 50-bp cut by Copom, the monetary policy committee at the Bank of Brazil, was agreed unanimously but more hawkish in tone.  The first eight cuts were accompanied by dovish statements that implied more rate relief to come.  For example the eighth one on July 11 said, “the Copom considers that, at this moment, the risks for the inflation path remain limited. The Committee also notes that, up to now, given the fragility of the global economy, the contribution of the external sector has been disinflationary.”  In contrast, today’s statement cautions, “considering the cumulative and lagged effects of policy actions implemented until the moment, which in part reflect in the ongoing recovery of economic activity, the Copom understands that, if the prospective scenario justifies an additional adjustment in the monetary conditions, this movement should be conducted with extreme parsimony.”  While the door has thus been left open a crack to the possibility of a tenth rate reduction, investors should no longer assume that additional stimulus beyond yesterday’s move is a certainty. 

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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