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Brazil Monetary Policy June 2019

Brazil: COPOM keeps monetary policy unchanged but turns dovish

At its 18–19 June meeting, the Central Bank of Brazil’s Monetary Policy Committee (COPOM) unanimously decided to keep the benchmark SELIC interest rate at its record low of 6.50%, where it has rested since the Central Bank paused its long and aggressive easing cycle in March 2018. The decision matched market analysts’ expectations. Notably, the Bank struck a more dovish tune compared to last meeting’s neutral tone in the accompanying statement.

A subdued economy in Brazil has warranted an accommodative monetary policy stance to stimulate growth, which largely drove the Bank’s decision to maintain rates at record lows. In addition, inflationary pressures remain contained, held back by economic slack. Accordingly, the Bank downgraded its inflation forecast, from 4.1% for the end of 2019 to 3.9%, in a scenario with interest and exchange rates determined by the market. Inflation is still expected to end the year below the Bank’s 4.25% target. However, the Bank held fire on easing to boost growth, stating that risks to inflation still exist in both directions and specifically that the continuity of reforms is needed to consolidate the benign outlook for inflation.

Looking forward, overall the Bank struck a dovish tone, signaling a potential rate cut. The Bank stated that the balance of risks to prices has evolved favorably, referencing the more dovish outlook for interest rates in advanced economies. In addition, the Bank made a direct reference to a rate cut when calling on the government to accelerate economic reforms, stating that “the continuity of the necessary reforms and adjustments in the Brazilian economy is essential for the reduction of the structural interest rate and for the sustainable recovery of the economy.”

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