Brazil: Central Bank slashes SELIC rate to 9.25%
July 26, 2017
At its 26 July 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, keeping the size of easing unchanged from May’s meeting. The SELIC rate now rests at 9.25%. The committee’s decision matched market analysts’ expectations and marked the seventh consecutive cut as the Central Bank moves to support economic growth in the battered economy.
Favorable inflation data along with a stabilizing economy have allowed the Bank space to loosen monetary conditions and are what primarily drove the decision. Price pressures have receded notably and inflation fell to a decade-low in May. The Bank updated its inflation forecast in the market scenario and now sees inflation at around 3.6% in 2017, in a scenario where the SELIC rate ends the year at 8.00%, and at 4.3% in 2018. While hard economic data has turned more upbeat in recent months, the Bank did acknowledge that recent confidence indicators have taken a hit as political uncertainty has risen notably in the country. The Bank commented that despite higher risks to reform implementation from political noise, it still felt that the large 100 basis point cut was appropriate as the impact on activity has been limited so far.
The Bank’s statement struck a more dovish tone than in the previous communique, leading to divergent views among analysts over the pace of the next rate cut. The Bank gave rather limited forward guidance overall, leaving the door open for another sizable 100-basis-point cut at the next meeting or a reduction in the pace of easing. The Bank highlighted that the size of the next move will depend on economic momentum, risks to the outlook as well as inflation expectations. Interpreting the Bank’s comments Nomura analyst Joao Pedro Ribeiro elaborated:
“The expected and unanimous decision was followed by a communique that directly referenced the continuity of the current pace of cutting in September, leading us to believe that another 100bp should be the base case from here (rather than a slowing to 75bp, which is still possible, however). As such, we incorporate this continuity into our view and lower our estimate of the terminal point for the Selic rate to 7.50% (from 8.0%). Risks associated with looser monetary policy forecasts remain – particularly related to fiscal/policy-relevant reform initiatives in Congress – but the present low inflation environment and the BCB’s recent reactions currently support these downward revisions, in our view.”