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Brazil Monetary Policy December 2018

Brazil: Central Bank holds SELIC rate at record-low as expected

At its 11–12 December 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. The SELIC rate has rested at the all-time low since the Central Bank paused its long and aggressive easing cycle in March.

The Bank’s decision to hold the SELIC rate at a record low was driven by contained inflation in Brazil’s economy, along with a tough external environment and weak economic growth. The accommodative stance is needed to help spur the economy’s recovery as tighter global financial conditions and trade tensions weigh on Brazil’s prospects. Although price pressures have picked up in recent months, inflation is hovering around the Central Bank’s target of 4.5% and recent data has been lower than expected. In the accompanying statement, the Bank stated that “underlying inflation measures are at comfortable levels”, signaling that it is content with the current policy stance. Moreover, the Bank revised down its inflation projects and sees inflation ending 2019 at 3.9% (previously: 4.2%) and 2020 at 3.6% (previously: 3.7%), in a scenario with interest and exchange rates determined by market expectations.

Looking ahead, the statement struck a slightly more dovish tone than that of the previous meeting. The Bank stated that the risk of frustration over Brazil’s economic reforms has cooled, likely reflecting Bolsonaro’s election win, and that there is a greater chance of a lower-than-expected inflation trajectory. The dovish tone hints that the SELIC rate could remain on hold longer than previously expected. However, the Bank refrained from giving explicit forward guidance in December’s meeting.

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