Brazil Monetary Policy September 2017

Brazil

Brazil: Central Bank slashes SELIC rate to 8.25%

September 6, 2017

At its 6 September meeting, the Central Bank’s Monetary Policy Committee (COPOM, Comité de Politica Monetaria) decided to cut the benchmark SELIC interest rate by 100 basis points, keeping the size of easing unchanged from the previous meeting. The SELIC rate now rests at 8.25%. The committee’s decision matched market analysts’ expectations and marked the eighth consecutive cut as the Central Bank moves to support economic growth in the battered economy.

Favorable inflation data along with a stabilizing economy have given the Bank space to loosen monetary conditions and are the primary factors that drove the decision. Price pressures have receded notably and inflation fell to an 18-year low in August. The Bank updated its inflation forecast in the market scenario and now sees inflation at around 3.3% in 2017, in a scenario where the SELIC rate ends the year at 7.25%, and at 4.4% in 2018. The Bank did stress 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 a slower pace of easing lies ahead. The SELIC rate has fallen rapidly this year and the economy has now turned a corner after growing in Q2, meaning that the need for an aggressive cycle is easing. Commenting on Nomura’s outlook for the SELIC rate, analyst João Pedro Ribeiro stated:

“We believe [the] decision implies a 75bp cut as the base case for the October meeting. Also, we see mostly dovish signs in the communiqué and argue that more cuts are likely further ahead. Therefore, we revise down our year-end Selic estimate to 7.0%, from 7.50%. Additionally, we believe that a combination of the BCB’s rationale and our view of the risks on inflation suggests downside risks to a 7.0% rate are higher than upside ones. The country’s fiscal fragilities and possible increase in risk premiums continue to stand as the main obstacles for more optimistic scenarios.”

FocusEconomics participants see the SELIC rate closing the year at 7.55% and 2018 at 7.59%.


Author: Angela Bouzanis, Senior Economist

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Brazil Monetary Policy September 2017

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


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