Brazil Monetary Policy January 2017

Brazil

Brazil: Central Bank ramps up easing cycle in attempt to support growth in floundering economy

January 11, 2017

Brazil - At its 11 January meeting, the Central Bank’s Monetary Policy Committee (COPOM, Comite de Politica Monetaria) decided to cut the benchmark SELIC interest rate by 75 basis points, increasing the pace of monetary easing. The SELIC rate now rests at 13.00%. The committee made a larger cut than market analysts had expected as the Central Bank tries to support economic growth in the battered economy.

Easing inflation has allowed for the Bank to have space to loosen monetary conditions and is what drove the decision. Inflation fell within the Central Bank’s target range in December for the first time since August 2014. Price pressures have eased faster than expected and the Bank has revised down its inflation projections. The Bank now sees inflation around 6.0% at the end of the year and around 3.4% in 2018.

The monetary authority’s communique pointed to a new quicker rate of easing, suggesting that cuts of 75 basis points could be the new normal. Nevertheless, the Bank stated that it will monitor fiscal developments as well as the highly-uncertain external environment in evaluating future decisions.

The large cut has caused a number of our panelists to revise down their forecasts for the SELIC rate this month. Commenting on Nomura’s revision, analyst Joao Pedro Ribeiro states:

“All-in-all, [the] […] decision increases our expectations that the BCB will pursue closer-to-neutrality interest rates more quickly, with front-loading of the cutting cycle. In this sense, not only do we expect the 75bp cut to remain in coming meetings, but we also revise down our year-end SELIC forecast, from 10.0% to 9.50%. We refrain from a larger downward revision given that the bank’s market scenario forecasts are basically at target.”

The majority of our analysts see the Central Bank cutting the SELIC rate further by the end of next year, with an average forecast of 10.86%. Next year, our panelists see the SELIC rate ending at an average of 9.83%.


Author: Angela Bouzanis, Senior Economist

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Brazil Monetary Policy January 2017

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


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