Central Bank of Brazil Breaks Streak of Interest Rate Cuts

May 17, 2018

Brazil’s key Selic interest rate had been reduced by a total of 725 basis points since October 2016, and Copom, the policy-making committee of the central bank, had not anticipated halting the easing cycle this soon when it previously deliberated in March. But by a unanimous 9-0 vote, officials agreed to leave the Selic rate unchanged at 6.5% and went the extra step of suggesting no further cuts at the next couple of meetings. According to a released statement,

The evolution of the baseline scenario and, mainly, of the balance of risks made it unnecessary to ease monetary policy further in order to mitigate the risk of delayed convergence of inflation toward the targets. Regarding the next meetings, the Committee deems appropriate to maintain its policy rate at its current level.

The big change since March has been a meaningful depreciation of the real. Many emerging market currencies have been victimized lately by diminishing support from capital inflows as investors perceive fed tightening possibly moving to a faster gear. In Brazil’s case, uncertainty is further amplified by the unclear outcome of domestic elections scheduled for October. Brazil’s economy experienced recession in both 2015 and 2016 followed by a weak recovery in 2017. The statement projects growth in 2018 of about 2.5%. Inflation was at 2.76% last month and is projected to climb to around 3.5% this year and 4% in the two remaining years of the policy horizon.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission. 



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