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Brazil Monetary Policy August 2020

Brazil: COPOM axes SELIC rate to new record low in August

At its 4–5 August meeting, the Central Bank of Brazil’s Monetary Policy Committee (COPOM) unanimously voted to cut the benchmark SELIC interest rate by 25 basis points, taking it to a new record low of 2.00%. The decision, which was in line with market expectations, marked the ninth consecutive cut since the easing cycle began in July 2019.

The decision to yet again cut the policy rate reflected the Bank’s commitment to mitigate the fallout from the coronavirus pandemic and combat below-target inflation. Despite incoming data hinting that a partial recovery may be on its way, activity in the sectors most affected by social distancing measures remains muted, despite offsetting effects of government stimulus. Consequently, uncertainty over economic prospects remains elevated, particularly for the end of this year as the effects of the emergency aid start to wear off.

Turning to inflation, COPOM sees inflation coming in at 1.6% at the end of 2020 and 3.0% for the end of 2021, in a scenario based upon market expectations. This is well below the Bank’s target of 4.0% and 3.75% for 2020 and 2021, respectively. Meanwhile, the Committee continues to see risks to the outlook in both directions: Downward pressures will stem from economic slack and a prolonged environment of uncertainty, while the fiscal response to the pandemic and setbacks to the reform agenda increasing risks premiums could cause upward pressure. Furthermore, COPOM noted that credit stimulus and income transfer programs could result in a smaller-than-estimated fall in aggregate demand, which could translate into higher-than-projected inflation.

With regards to forward guidance, although COPOM reiterated that the economic environment still calls for strong monetary stimulus, it stated that the room for additional policy easing is narrow due to prudential and fiscal stability reasons. Thus, any future adjustments to the current degree of monetary stimulus would be gradual and depend on the fiscal trajectory as well as potential changes to the inflation outlook.

The monetary policy meeting is scheduled for 15–16 September.

Commenting on the decision, Jose Carlos Sanchez, senior economist, and Alexis Milo, chief economist and head of research, both at HSBC Mexico, noted:

“Given that we think that the central bank could have exhausted the traditional monetary space in this meeting, further stimulus may come from non-traditional tools. While the central bank has not announced a specific plan on this front yet, the legal amendments for non-conventional policies are ready in case they are needed.”

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