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Brazil Monetary Policy September 2019

Brazil: COPOM cuts SELIC rate, taking it to a new historical low

At its 17–18 September meeting, the Central Bank of Brazil’s Monetary Policy Committee (COPOM) unanimously decided to chop the benchmark SELIC interest rate from 6.00% to a new historical low at 5.50%. The move was widely expected by market analysts and marked the Bank’s second consecutive cut and a continuation of the easing cycle to help support the economic recovery.

COPOM’s decision to cut rates was largely driven by moderate domestic growth, contained inflationary pressures and a more dovish outlook for interest rates in advanced economies amid persisting risks to the global economy. Although, inflation rose mildly in August, it is at a comfortable level and expected to remain below the Central Bank’s target of 4.25% for the end of 2019. Monetary stimulus in major economies has created a relatively benign environment, reducing external financial pressures, while progress on the government’s fiscal reform have supported the continuation of interest rates cuts. Consequently, the Bank’s inflation forecast for end-2019 was revised down to 3.3% (previous: 3.6%) and for end-2020 down to 3.6% (previous: 3.9%), in a scenario based upon market expectations.

Looking ahead, COPOM maintained their dovish tone from the last meeting, indicating potential room for further cuts. Should the “benign scenario” for prospective inflation remain, this would allow for additional monetary stimulus. However, risks to the inflation trajectory exist in both directions, and a potential further easing would depend on the continuation of the government’s reform agenda as well as economic activity and the balance of risks. Commenting on the outlook for the SELIC rate, Cassiana Fernandez, research analyst at JPMorgan adds:

“Perseverance with fiscal consolidation is essential; but the outlook gives comfort to call for further easing. In short […], global and domestic headwinds have weakened the prospects for the economic recovery in Brazil. And on the policy front the need for further fiscal consolidation limits room to maneuver, allowing the BCB to extend its easing cycle. We continue looking for the SELIC rate to end the year at 4.75% after a 50bp cut in the October meeting and a final 25bp cut in December, but we recognize that tonight’s statement changed the balance of risk towards the possibility of even lower terminal rate.”

The next monetary policy meeting is scheduled for 29-30 October.

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