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Brazil Monetary Policy March 2020

Brazil: COPOM slashes key interest rate to new record low in March

At its 17–18 March meeting, the Central Bank of Brazil’s Monetary Policy Committee (COPOM) unanimously voted to cut the benchmark SELIC interest rate from 4.25% to a new historic low of 3.75%.

COPOM’s sixth consecutive rate cut came as the Bank braces for a deteriorating outlook for the Brazilian economy this year amid the fast-spreading coronavirus. The virus has sparked marked volatility in asset prices and commodity markets are taking a beating due to the pandemic as well as the Saudi Arabia-Russia oil price war. Although available pre-coronavirus data for the first quarter was relatively upbeat, incoming data will be far gloomier.

Turning to inflation, COPOM expects inflation to come in around 3.1% at the end of 2020 and 3.6% for the end of 2021, based on market expectations. This is well below the Bank’s inflation target for 2020 of 4.0%. The Committee continues to view the risks to the inflation outlook as fairly balanced: Downward pressures will stem from economic slack and the Covid-19 pandemic’s hit on demand, whereas upward price pressures could arise due to the Bank’s further rate cuts, delayed reforms increasing risk premium, and the deteriorating external environment.

In its forward guidance, the Bank struck a much more dovish tone than in its February meeting when the Bank had suggested an end to its easing cycle. In its March communiqué, the Committee stressed that it “will continue to deploy its arsenal of monetary, exchange rate and financial stability policies to fight the current crisis” and stated that maintaining a record-low level rate was essential to supporting the economic recovery. However, the Bank noted that delayed fiscal reforms or changes to the fiscal consolidation process could result in a higher structural interest rate, in which case additional monetary easing may be “counterproductive” and cause tighter financial conditions. March’s rate cut comes as the Brazilian real passed the BRL 5.00 per USD threshold on 16 March and the Bank has ramped up interventions to try to stymie the marked currency depreciation. The Bank will have to tread carefully moving ahead to balance supporting the economy with avoiding causing the real to tank even further.

The next monetary policy meeting is scheduled for 5–6 May 2020.

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