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Brazil Monetary Policy August 2018

Brazil: Central Bank holds SELIC rate at 6.50%

At its 31 July–1 August meeting, the Central Bank of Brazil’s Monetary Policy Committee (Comité de Politica Monetaria, COPOM) unanimously decided to keep the benchmark SELIC interest rate at its record low of 6.50%. The decision matched market analysts’ expectations. The Central Bank paused the long and aggressive easing cycle that began at the end of 2016 at its May meeting.

The Bank’s accompanying statement echoed the previous meeting’s and stressed that risks to the inflation outlook remain balanced in both directions, justifying the decision to hold the SELIC rate unchanged. On the one hand, low inflation expectations and economic slack could prompt inflation to surprise on the downside going forward; on the other hand, a lack of economic reforms or a further deterioration in the outlook for emerging market economies could drive price pressures up. While inflation did spike in June this was due to the truckers’ strike, and the Bank stated that it expects the high inflation to be temporary and that underlying price pressures are still moderate. Moreover, the weak state of Brazil’s economy justifies an accommodative monetary policy stance.

The Bank revised up its inflation expectation for 2019 but left this year’s unchanged, seeing year-end inflation of around 4.2%. Next year, the Bank sees inflation ending 2019 at 3.8% (previously: 3.7%), assuming the SELIC rate concludes the year at 8.00% and the real at 3.70 per USD. However, overall, the statement struck a broadly neutral tone, stating that future decisions will depend on incoming data, inflation expectations and the balance of risks. That said, the weakening of the real is likely to stoke upward pressures, and the currency is expected to remain under pressure going forward due to election-related uncertainty in Brazil and a tightening cycle by the U.S. Federal Reserve.

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