Brazil Monetary Policy


Brazil: Central Bank leaves rate unchanged in July

July 16, 2014

At its 16 July meeting, the Central Bank’s Monetary Policy Committee (COPOM, Comite de Politica Monetaria) decided to leave the benchmark SELIC interest rate unchanged at 11.00%. The decision was in line with market expectations.

The Bank’s statement was exactly the same as the one that followed the prior meeting that took place on 28 May. On the day of the statement, most analysts considered that the Bank had not provided any indication of its next steps, thus leaving the door open for future moves. On one hand, disappointing growth figures could put pressure on the Bank for a rate cut. On the other hand, if risks of inflation persist, the Bank could have to resort to raising the SELIC rate.

However, on 25 July, the Bank introduced important measures in the banking system. The monetary institution lowered the banks’ reserve requirements and the risk calculation to certain loans. The measure implied an injection of USD 20.2 billion (roughly 0.6% of GDP) into the banking system, which is expected to foster credit to firms, especially in the retail sector. Nevertheless, credit growth in Brazil has been decelerating in the recent months. In addition, banks will be allowed to acquire loan portfolios from eligible financial institutions. Through these measures, the monetary authority seeks to improve the liquidity conditions in the country and to nurture ailing economic growth.

The Bank’s measures came amid concerns over the cooling of the economy, while inflation remains above the target. In fact, this combination of low growth and high inflation recently has gained presence in the economic debate in the country. Presidential elections are taking place in October, and candidates have been debating the fact that the country might be approaching a “stagflation” scenario, although Central Bank Governor Alexandre Tombini denied this possibility in a speech at the Senate on 5 August. Tombini also said that the macro-prudential measures introduced do not contradict the monetary policy stance, since the SELIC rate and the new macro-prudential measures are different instruments and have different objectives. Tombini added that, while the Bank will remain vigilant over inflation, the recent measures are expected to promote growth from the supply-side of the economy and thus are not likely to add to the inflationary pressures. For the moment, the Bank has not announced more measures, although Enestor Dos Santos, Economist at BBVA Research, commented that:

“We would not be surprised if more macro-prudential measures are implemented to try to drive growth up, although we continue to see the Selic rate being maintained at 11.0% until the end of 2014. “

Dos Santos added, regarding the introduction of the new measures:

“By doing so the monetary authority seems to be more concerned about growth -and less about inflation- than it sounded yesterday, which should make more difficult the task of anchoring long-term inflation expectations (currently around 5.5%-6.0%, significantly above the 4.5% inflation target).”

LatinFocus Consensus Forecast participants see the SELIC rate ending 2014 at an average of 11.21%. Panelists see the SELIC rate ending 2015 at an average of 12.05%.


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Brazil Monetary Policy Chart

Brazil Monetary Policy July 2014 3

Note: SELIC target rate (Taxa SELIC meta) in %.
Source: Central Bank of Brazil (Banco Central do Brasil).

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