Brazil Monetary Policy October 2016

Brazil

Brazil: Central Bank embarks on easing cycle, cuts SELIC rate

At its 19 October meeting, the Central Bank’s Monetary Policy Committee (COPOM, Comite de Politica Monetaria) decided to cut the benchmark SELIC interest rate for the first time in four years, lowering it from 14.25% to 14.00%. The decision met market expectations and marked the beginning of what is expected to be a long easing cycle to support economic growth in the battered economy. The rate had been kept at a near-decade high of 14.25% for over a year, against a backdrop of elevated inflationary pressures.

In the accompanying statement, the Bank stated that a gradual easing of monetary conditions is compatible with bringing inflation to the 2017 and 2018 targets. Inflation has eased in recent months, giving some space to the Central Bank to begin a badly-needed easing cycle to support economic activity. While economic data has begun to stabilize in Brazil, there is still a high level of slack in the economy, which remains in a deep recession. This slack should contribute to inflation evolving along a favorable path.

The overall tone of the communique was slightly hawkish, signaling that the easing cycle could be slow. The Bank stressed that a number of risks to the inflation outlook remain and that the easing would be “moderate and gradual”. In addition, while the Bank left its inflation forecast for 2017 unchanged, 2018’s projection was revised up a notch to 4.7%—above the target of 4.5%. Despite this hawkish guidance, the Bank pointed out that the magnitude and pace of easing could be increased if disinflation in key consumer price components resumes at an appropriate pace and the government makes progress with key economic reforms. Commenting on the outlook for the SELIC rate, Joao Pedro Ribeiro, analyst at Nomura adds:

“All-in-all, we continue to believe that, under our assumptions of somewhat successful fiscal reform, the BCB is in for a deep cutting cycle that will take the Selic rate to 10.00% by the end of 2017. We also maintain our view that the November rate cut will be 50bp. However, we recognize the hawkish elements of today’s communique as indicative that the cutting pace can remain slow (25bp) for a longer time.”

The majority of our analysts see the Central Bank cutting the SELIC rate further by the end of the year, with an average forecast rate of 13.63%. Next year, our panelists see the SELIC rate ending at an average of 11.00%.


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Brazil Monetary Policy Chart


Brazil Monetary Policy October 2016

Note: SELIC target rate (Taxa SELIC meta) in %.
Source: Central Bank of Brazil (Banco Central do Brasil).


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