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Brazil Monetary Policy June 2018

Brazil: Central Bank takes wait-and-see approach, holds the SELIC rate at 6.50%

At its 20 June meeting, the Central Bank of Brazil’s Monetary Policy Committee (Comité de Politica Monetaria, COPOM) unanimously decided to keep the benchmark SELIC interest rate at its record low of 6.50%. The decision matched market analysts’ expectations. At the previous meeting in May, the Central Bank had paused the long and aggressive easing cycle that began at the end of 2016.

In the accompanying statement, the Central Bank stressed that risks to the inflation outlook remain balanced in both directions, justifying the decision to hold the SELIC rate unchanged. The Bank stated that low inflation expectations could weigh on price pressures going forward, while, conversely, a lack of economic reforms or a further deterioration in the outlook for emerging market economies could drive price pressures up. The Bank also emphasized that it bases its monetary policy decisions on the evolution of inflation expectations and economic activity, not on short-term shocks. A recent rapid depreciation of the real had led to some question if the Bank should raise interest rates; however, policymakers have preferred to intervene in the market with currency swaps to shore up support for the currency. That said, the Bank did acknowledge that a recent truckers’ strike has made it challenging to assess the economy’s underlying momentum.

Looking forward, the Bank revised up its inflation expectations, penciling in year-end inflation of around 4.2% in 2018 (previous: 3.6%), assuming the SELIC rate ends the year at 6.50% and the exchange rate ends the year at 3.63 per USD. Next year, the Bank sees inflation ending the year at 3.7%, assuming the SELIC rate ends the year at 8.00% and the real at 3.60 per USD. Notably, the statement was devoid of clear forward guidance, contrasting the previous statement that stated that the Bank would hold the SELIC rate unchanged going forward, adding a bit of uncertainty to the outlook for the interest rate. Commenting on Nomura’s SELIC rate forecast, analyst João Pedro Ribeiro adds:

“All-in-all, we still see a more challenging and uncertain environment that is more dependent on the behavior of FX and its possible impact on inflation expectations/forecasts. We keep our call for stability at 6.50% in the 1 August meeting but also recognize that the BCB does not close the door to changes to the policy rate in the near term. We also continue to see a hike in Q4 2018 as more likely than not, a call that is naturally dependent on the currency’s behavior and the election, and we may need to revisit this call depending on how these two variables behave.”

Brazil Interest Rate Forecast

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