Brazil: Central Bank cuts SELIC rate to 6.75%, signals end of easing cycle
At its 7 February meeting, the Central Bank of Brazil’s Monetary Policy Committee (Comité de Politica Monetaria, COPOM) decided to cut the benchmark SELIC interest rate by 25 basis points, a smaller cut than the 50 basis-point reduction it made at the previous meeting. The SELIC rate now rests at 6.75%—a record low. The committee’s decision matched market analysts’ expectations and marked the 11th consecutive cut in the Bank’s easing cycle.
Historically low inflation has afforded the Central Bank space to reduce rates to support the economic recovery. In the accompanying press release, the Bank commented that the behavior of inflation is favorable and refrained from revising its forecasts. The Bank sees inflation ending 2018 around 4.2%, in a scenario where the SELIC rate ends the year at 6.75%.
The Bank’s forward guidance suggested that this was likely the final cut in the easing cycle, if incoming data is as expected. The SELIC rate is now at a historical low and should be sufficient to stroke growth. Moreover, pre-election uncertainty could cause the Bank to take a more cautious stance and refrain from changing interest rates. However, the Bank did still highlight that upside and downside risks to the outlook persist and left a window open for a surprise move. Commenting on the outlook for policy rates, analyst João Pedro Ribeiro adds:
“We continue to believe that: the current level of the Selic rate, the prospects for the output gap and inflation conditions should allow the BCB to remain on hold throughout 2018, before normalization to higher rates next year. The pace of narrowing of the very wide output gap, the behavior of inflation expectations going into an uncertain electoral process and the conditions in the external environment will all be key in determining when and how such normalization begins.”