Brazil’s central bank cut its benchmark Selic rate by 100 basis points to 11.25 percent and said the higher pace of monetary easing was appropriate in light of forecasts that point to a policy rate of 8.5 percent by the end of 2017 with the rate remaining at that level until the end of 2018.
The Central Bank of Brazil has now cut its rate by 300 basis points since embarking on an easing cycle in October 2016 and by 250 basis points this year alone.
In October and November last year the central bank cut the rate by 25 basis points each time and then accelerated the pace of easing to 75 points in both January and February this year.
Copom, the central bank’s monetary committee, was unanimous in today’s decision to cut the Selic rate by one percentage point and said the future pace of monetary easing would depend on the degree of front loading of rate cuts, economic activity, inflation forecasts and expectations, and the economy’s structural interest rate.
Today’s one percentage point rate cut had been expected by many following a decline in March inflation to the lowest rate since 2010 at 4.57 percent, down from 4.76 percent in February.
Copom said convergence of inflation to its target of 4.5 percent was compatible with its current easing process and economic activity was stabilizing and should gradually recover this year.
“The disinflation process is more widespread,” the central bank said, adding that lower food prices amounted to a favourable supply shock and inflation expectations for 2017 were now around 4.1 percent and 4.5 percent for 2018, and slightly below that level of 2019.
The central bank’s inflation forecast for 2017 and 2018 were now around 4.1 percent and 4.5 percent based on the assumption the policy rate ends 2017 at 8.5 percent and stays at that level.
The central bank targets inflation of 4.5 percent with a range of plus/minus 1.5 percentage point, a level that is likely to be lowered in June when it is being revised by the government. However, inflation has also overshot the bank’s target in the last seven years.
Brazil’s Gross Domestic Product contracted by an annual rate of 2.5 percent in the fourth quarter of last year, the 11th consecutive quarter of shrinking output.
But Brazil’s real has been firming since January last year, following five years of depreciation, and was trading at 3.13 to the U.S. dollar today, up 4.2 percent this year.
The Central Bank of Brazil issued the following statement:
“The Copom unanimously decided to reduce the Selic rate by one percentage point, to 11.25 percent per year, without bias.
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