Brazil Monetary Policy October 2018


Brazil: Central Bank holds SELIC rate at 6.50% in first post-election meeting

October 31, 2018

At its 30–31 October meeting, the Central Bank of Brazil’s Monetary Policy Committee (Comité de Política Monetária, COPOM) unanimously decided to keep the benchmark SELIC interest rate at its record low of 6.50%. The decision matched market analysts’ expectations and marked a pause in the long and aggressive easing cycle that began at the end of the Central Bank’s meeting in May 2016.

The Bank’s decision to hold the SELIC rate at a record low was driven by persistently weak economic growth, while manageable inflation has allowed the Bank to keep monetary conditions loose. That said, price pressures have risen in recent months and upside risks to the inflation outlook are elevated. In the accompanying statement, the Bank commented that the deteriorating global environment for emerging markets, as well as the possibility of parliamentary gridlock, are risks to the inflation outlook. Accordingly, the Bank raised its projections and now sees inflation ending 2019 at 4.2% (previously: 4.1%). However, the inflation rate is still below the Bank’s target of 4.25% for 2019.

Looking ahead, the statement struck a neutral tone devoid of strong guidance on the trajectory of interest rates. The Bank stressed the need for economic reform to keep inflation in check and support the recovery. Barring any unexpected events, the Bank is likely to keep interest rates on hold until the new government’s agenda is clear. President-elect Jair Bolsonaro, who triumphed in the 28 October vote, campaigned on a pro-reform agenda, which should bode well for the country’s economic prospects and reduce the risk of reform standstill. Nevertheless, there remains some uncertainty over his political muscle in Congress and the exact details of reforms that he may propose.

Most of our analysts expect the Bank to hold the SELIC rate unchanged for the rest of 2018. Next year, the bulk sees the Bank gradually tightening rates as the economic recovery gains traction. FocusEconomics Consensus Forecast participants see the SELIC rate closing 2019 at 8.13% and 2020 at 8.13%.


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