Brazil: Central Bank slashes SELIC rate to 7.50%
October 25, 2017
At its 25 October meeting, the Central Bank’s Monetary Policy Committee (COPOM, Comité de Politica Monetaria) decided to cut the benchmark SELIC interest rate by 75 basis points, reducing the size of easing from the 100 basis-points decrease seen at the previous meeting on 6 September. The SELIC rate now rests at 7.50%. The committee’s decision matched market analysts’ expectations and marked the ninth consecutive cut as the Central Bank moves to support economic growth in the battered economy.
Historically low inflation along with a recovering economy have given the Bank space to loosen monetary conditions and are the primary factors that drove the decision. Price pressures have receded notably this year, and inflation hovered close to a two-decade low in September. Accordingly, the Bank updated its forecasts in the scenario with interest and exchange rates determined by market predictions, and now sees inflation at around 4.3% in 2018 and 4.2% in 2019; this scenario assumes that the SELIC rate will end 2017 and 2018 at 7.0% and rise to 8.0% over the course of 2019. Despite the overall favorable inflation data, the Bank stressed that there are both upside and downside risks to its inflation outlook, highlighting in particular that it could be affected by the slow progress of economic reforms.
The Bank’s statement signaled that the easing cycle could be nearing the end and that a smaller cut will likely be made at the next meeting. The SELIC rate has fallen rapidly this year, and the economy has now turned a corner, meaning that the need for an aggressive cycle is over. Commenting on Nomura’s outlook for the SELIC rate, analyst João Pedro Ribeiro stated:
“The post-meeting communiqué shows that the cycle is nearing an end and that base case should be for a final 50bp in December, with a 7.0% terminal rate. We continue to see risks to that level as skewed to the downside—potential for 6.75% is much higher than for 7.25%, in our opinion, but requires inflation surprises.”