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Brazil Monetary Policy June 2020

Brazil: COPOM chops key interest rate to new record low in June; leaves door open for additional easing

At its 16–17 June meeting, the Central Bank of Brazil’s Monetary Policy Committee (COPOM) unanimously decided to chop the benchmark SELIC interest rate from 3.00% to a new historical low of 2.25%. The move, which was widely expected by market analysts, marked the eight-consecutive cut since July 2019 and the second meeting straight that the Bank axed the rate by 75 basis points.

The decision to yet again cut rates reflected the Bank’s efforts to cushion the economy from the Covid-19 crisis and below-target inflation expectations. The pandemic continues to wreak havoc on global growth despite large fiscal and monetary stimulus packages, and Brazil’s GDP shrank at the quickest rate in nearly five years in the first quarter, with incoming data suggesting the blow will be worse in the second quarter. There is also heightened uncertainty with regards to the pace of the recovery in the second half of this year.

Regarding inflation, the 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. Inflation is thus projected to significantly undershoot the Bank’s inflation 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: Economic slack will exert downward pressures, particularly if the pandemic drags on for a longer period, while the fiscal response to the health crisis and setbacks to the reform agenda increasing risks premiums could cause upward pressure. The COPOM also added that credit stimulus and cash transfer programs could result in a smaller-than-estimated drop in aggregate demand, which would create asymmetry in the balance of risks, potentially translating into a higher-than-projected inflation trajectory.

Looking ahead, while the COPOM stated it deems the magnitude of the monetary stimulus compatible with the impact of the pandemic, suggesting that the easing cycle may be over, it still left the door open for an additional residual cut, if necessary. The Committee thus adopted a wait-and-see stance, stating incoming data on the evolution of the pandemic and a reduction in fiscal uncertainty will be essential for defining its next moves.

The monetary policy meeting is scheduled for 4–5 August.

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