Brazil’s central bank cut its benchmark Selic interest rate by 100 basis points for the fourth time in a row but said it would slow down the pace of easing at its next policy meeting and is looking toward a gradual ending of the monetary easing cycle.
The Central Bank of Brazil has now cut its policy rate by 600 basis points since embarking on the easing cycle in October 2016 and by 550 points this year on six different occasions. Today’s rate cut was widely expected by economists.
The bank’s Selic rate now stands at 8.25 percent and the decision by the bank’s monetary policy committee, known as Copom, was unanimous and without a bias.
Copom said the current scenario includes the Selic rate ending at 7.25 percent by the end of this year, down from July’s forecast of 8.0 percent and implying the key rate will be lowered by another 1 percentage point in coming months. Copom next meets Oct. 25.
Copom expects the Selic rate to fall further to 7.0 percent in early 2018 but then rise to 7.5 percent by the end of next year. In July the central bank saw Selic remaining at 8.0 percent through 2018.
Last week the central bank’s survey showed that economists had lowered estimates for the Selic rate to end the year at 7.25 percent from 7.50 percent while 2018 estimates remained at 7.50 percent for the third week in a row.
Recent economic data are consistent with a gradual recovery of Brazil’s economy, the bank said, adding the global outlook and the outlook for inflation are favorable.
Brazil’s economy has finally begun to pull out of its worst ever recession with its Gross Domestic Product expanding for the second quarter in a row as household spending rose for the first time in over two years. Government spending and investments, however, continued to decline.
GDP grew by 0.2 percent in the second quarter following 1.0 percent in the first quarter, the first quarterly expansions since 2015. On an annual basis, the economy grew by 0.3 percent for the first annual growth since the first quarter of 2014.
Inflation, meanwhile, remains well below the central bank’s target range and at the lowest seen since February 1999. In June the government lowered the inflation target for 2019 to 4.25 percent and to 4.00 percent for 2020 while retaining the 1.5 point range.
In August inflation fell to 2.46 percent from 2.71 percent in July compared with the central bank’s target range of 4.5 percent, plus/minus 1.5 percentage points, as food and beverage prices fell further due to a strong harvest.
The fall in inflation bolstered expectations the central bank would continue to cut rates by another 100 basis points today and triggered further reductions in rate expectations.
After depreciating from mid-2014 through most of 2015, Brazil’s real started firming in February 2016 and has continued to slowly rise since then. Today the real was trading at 3.1 to the U.S. dollar, up 5 percent since the start of the year.
The Central Bank of Brazil issued the following statement:
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