Brazil Monetary Policy April 2017


Brazil: Central Bank slashes SELIC rate to 11.25% to support depressed economy

April 13, 2017

At its 13 April meeting, the Central Bank’s Monetary Policy Committee (COPOM, Comite de Politica Monetaria) decided to cut the benchmark SELIC interest rate by 100 basis points, stepping up the pace of monetary easing from February’s meeting. The SELIC rate now rests at 11.25%. The committee’s decision matched market analysts’ expectations as the Central Bank moves to support economic growth in the battered economy.

Favorable inflation data has allowed the Bank space to loosen monetary conditions and is what primarily drove the decision. Price pressures have eased faster than previously expected and decreasing food prices should act as a positive supply shock going forward. While the Bank commented that the economy is stabilizing, lingering uncertainties over U.S. economic policy and the future evolution of commodity prices could threaten the improvement. The Bank updated its inflation forecast in the market scenario and now sees inflation ending the year around 4.1% in 2017, under the assumption that the SELIC rate ends the year at 8.50%.

The monetary authority’s communique suggested that it will stick with 100 basis-point cuts going forward, although this will depend on incoming data. Both upside and downside risks are plaguing Brazil’s inflation outlook, such as the approval of fiscal consolidation measures, the uncertain external environment and shocks in food prices. Commenting on Nomura’s outlook for future easing, Latin American strategist Joao Pedro Riberio states:

“Our expectations of a combination of: benign inflation, slow activity recovery (with very negative output gap) and eventual government success on social security reform, lead us to believe that an acceleration in the cutting pace is, currently, more likely than a deceleration. Naturally, negative surprises (particularly on the political front) would alter these likelihoods.”

All of our analysts see the Central Bank cutting the SELIC rate further by the end of the year, with an average forecast of 8.93%. Next year, our panelists see the SELIC rate ending at an average of 8.61%.


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Brazil Monetary Policy Chart

Brazil Monetary Policy April 2017

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

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