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Brazil Monetary Policy February 2020

Brazil: COPOM slashes key interest rate in February, suggests holding pattern ahead

At its 4–5 February meeting, the Central Bank of Brazil’s Monetary Policy Committee (COPOM) unanimously voted to cut the benchmark SELIC interest rate from 4.50% to a new record low of 4.25%, as had been expected.

The Committee’s latest rate reduction came on the back of below-target inflation expectations and the Bank’s ongoing efforts to revive economic growth, with February’s meeting marking the fifth consecutive rate cut. Inflation ended 2019 just above the Central Bank’s 4.25% target for 2019 at 4.31%. That said, COPOM expects inflation to come in around 3.4% at the end of 2020 and 3.8% for the end of 2021, based on market expectations. The Bank’s inflation target for 2020 is 4.0% with a tolerance band of plus or minus 1.5 percentage points. The Committee continues to view the risks to the inflation outlook as fairly balanced, with upward price pressures stemming from the COPOM’s easing cycle, while stagnant economic activity poses a downside risk.

COPOM continued to judge the economic recovery to be on a stronger footing, while the external environment for emerging market economies remains favorable. Even so, although the third quarter GDP result was promising, more recent data sent mixed signals about whether the economy was able to maintain momentum in the fourth quarter. The Central Bank also alluded to uncertainty surrounding the government’s policies in its latest release: While noting that “the process of reforms and necessary adjustments in the Brazilian economy has advanced”, the Bank also highlighted the risk of stalled reforms hampering the ongoing recovery.

In its forward guidance, the Bank suggested it would stay on hold as the lagged effects of its easing cycle, which began last July, continues to work through to the economy. In its press release, it stated “the Committee deems appropriate to interrupt the monetary easing process” and keep rates unchanged; however, it also stressed that it would remain data dependent, “with increasing weight for 2021”.

Commenting on the monetary policy outlook, Cassiana Fernandez, Cristiano Souza and Vinicius Moreira, economists at JPMorgan, explained:

“COPOM stepped up the hawkish tone signaling the end of the easing cycle. […] Going forward, after the expected pause in the next two quarters, we see the central bank (CB) starting a slow normalization of rates by September. However, we acknowledge that one important risk to this scenario emerged in the last weeks. At this point, we believe that the effects of coronavirus in the global economy could significantly lower the demand for Brazilian exports, which could delay the closing of the output gap and defer the normalization process.”

The next monetary policy meeting is scheduled for 17–18 March 2020.

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