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Brazil Monetary Policy February 2019

Brazil: Central Bank holds SELIC rate at record-low

At its 5–6 February 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%, where it has rested since the Central Bank paused its long and aggressive easing cycle in March. The decision matched market analysts’ expectations.

The Bank’s decision comes amid below-target inflation in Brazil’s economy, along with a gradual economic recovery. A rally in the real and economic slack have helped keep price pressures in check, allowing for the Bank to keep rates at a low level to support growth. COPOM left its inflation forecasts unchanged from the previous meeting and sees inflation ending the year at 3.9%, with interest and exchange rates determined by the market, which is below the Bank’s target of 4.25% inflation for 2019.

Looking forward, the Bank’s statement was devoid of clear forward guidance, and most of our analysts expect rates to remain on hold in the near-term. That said, COPOM did acknowledge that inflationary risks have cooled somewhat since the last meeting, reflecting the more dovish tone of the U.S. Federal Reserve and likely slower pace of monetary tightening in advanced economies. Nevertheless, the Bank continued to see that risks to inflation were skewed to the upside and highlighted that frustration over sluggish reform momentum could stroke price pressures.

Summarizing Nomura’s view of the meeting, Joao Pedro Ribeiro explained:

“In total, [the] decision was in line with our view of a largely “wait-and-see” stance by the BCB to kick-off the year and the reform discussions within the government/Congress. In this setting, we highlight the more benign global outlook on the monetary policy front following the Fed’s dovish January meeting and see more room for the BCB to remain on hold throughout the year, pushing our forecast for the beginning of a gradual rate hike cycle in Brazil from late-2019 into 2020.”

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