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Brazil cuts benchmark interest rate to an all time low of 5%; inflation running below target

Thursday, October 31st 2019 - 09:49 UTC
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The decision of the bank's nine-person strong rate-setting committee, known as 'Copom', to reduce the Selic rate by 50 basis points was unanimous The decision of the bank's nine-person strong rate-setting committee, known as 'Copom', to reduce the Selic rate by 50 basis points was unanimous

Brazil's central bank cut its benchmark interest rate to a new all-time low of 5.00% on Wednesday as expected, but signaled that further easing may be less aggressive than it has been in recent months, despite inflation running well below target.

In a change from recent statements, the bank's policymakers warned that the historically low level of rates could raise uncertainty and lift inflation within the time horizon for which the bank sets policy.

The decision of the bank's nine-person strong rate-setting committee, known as 'Copom', to reduce the Selic rate by 50 basis points was unanimous. In its accompanying statement, Copom said the benign outlook for inflation “should allow for an additional adjustment of equal magnitude,” but warned that low rates could increase uncertainty about the transmission channels and “may raise the inflation trajectory over the relevant monetary policy horizon.”

Wednesday's move was Copom's third consecutive 50-basis point cut under the leadership of Roberto Campos Neto, the U.S.-trained economist and former banker who took the helm of the central bank in February.

In recent months inflation has continued to fall, the pass-through impact on the exchange rate has been muted and Congress passed a landmark pension reform, saving some 800 billion reais (US$ 200 billion) in public spending over the next decade.

All of that, against a backdrop of a widespread global monetary easing cycle, has until now given Copom the necessary cover to cut interest rates aggressively.

While policymakers noted the upside risks to inflation and economic uncertainty from ultra-low rates, Copom's inflation outlook remained dovish.

Using a “hybrid” forecast of a constant exchange rate of 4.05 reais per dollar and a broad consensus view on interest rates, Copom projected 3.7% inflation next year and 3.6% in 2020. That's still below the central bank's official 2020 and 2021 targets of 4.00% and 3.75%, respectively.

 

Categories: Economy, Brazil.

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