Brazil: COPOM slashes key interest rate to a new record low in December
At its 10–11 December meeting, the Central Bank of Brazil’s Monetary Policy Committee (COPOM) unanimously voted to cut the benchmark SELIC interest rate from 5.00% to a new historical low of 4.50%. The move was widely expected by FocusEconomics panelists and represented the Bank’s fourth consecutive cut as part of its efforts to support the economic recovery.
COPOM’s latest move came as inflation remains below the Bank’s 4.25% target for the end of 2019. Moreover, COPOM views the economic recovery to be gaining traction, albeit gradually, with lingering risks to the outlook stemming from stalled reforms and a deterioration in the external environment. Moreover, the Bank was guided by accommodative monetary policy stances in advanced economies, which gives emerging markets’ central banks more policy scope. Regarding the inflation outlook, the Bank sees the risks as balanced, with lagged effects from the Bank’s prior easing likely to exert upward pressure, whereas the sluggish economic recovery could cap inflationary pressures. COPOM expects inflation to come in around 3.6% at the end of 2020 and 3.8% for the end of 2021, based on market expectations.
Looking ahead, COPOM sees additional room to maneuver given the below-target inflation expectations, but emphasized exercising caution would be necessary at the current stage of the economic cycle. The Bank currently projects another 50 basis points in easing in the year ahead but noted that any move will continue to depend on the evolution of economic activity, the balance of risks and inflation. That said, in our latest LatinFocus Publication, panelists were relatively split on the scenario for 2020, with a small majority seeing the rate on hold next year.
Commenting on their monetary policy outlook, Cassiana Fernandez and Vinicius Moreira, economists at JPMorgan, noted:
“COPOM kept the door open for further easing […] The Central Bank’s models continued showing inflation significantly below target, suggesting room for additional easing next year. In this sense, after becoming more cautious about the confidence in our monetary policy expectations following the recent strong economic growth numbers, today’s statement makes us feel more comfortable about our call for a 25bp cut in February.”
The next monetary policy meeting is scheduled for 4–5 February 2020.