Wednesday, July 20, 2016

Brazil holds rate as Copom looks for further disinflation

    Brazil's central bank left its benchmark Selic rate steady at 14.25 percent, saying higher-than-expected inflation may persist due to food prices, uncertainty regarding the implementation of economic adjustments and a prolonged period of above-target, high inflation that can delay the process of disinflation.
    In the first meeting of the Central Bank of Brazil's policy committee chaired by Ilan Goldfjan, the statement by Copom flushed out some of the issues that resulted in a unanimous policy decision. Under its past president, Alexandre Tombini, the central bank typically issued very brief statements.
    While concern over inflation triggered the decision to maintain the rate, Copom added his could be countered by the possibility of a quicker implementation of economic changes that improve confidence and lower inflation expectations, and the possibility that spare capacity in the economy leads to more rapid disinflation that expected.
    But the base case scenario and the current balance of risks indicate there is no room for a loosening of monetary policy, the central bank said.
    Brazil's inflation rate eased to 8.84 percent in June from 9.32 percent in May.
    Although Copom said its projections for inflation remained relatively stable, they were lower than in the last inflation report and inflation was projected around 4.5 percent in 2017.
    However, the central bank added that financial markets project inflation next year of around 5.3 percent, above the bank's midpoint target of 4.5 percent. This year the central bank has a target range of 2 percentage points around that target but this narrows to 1.5 points in 2017.
    The central bank added that recent data show a stabilization of economic activity in the short term, but the economy continues to operate with a "high level of idleness," with the external environment challenging and the dynamics of the global economic recovery fragile and uncertain.
    Brazil's economy contracted by an annual rate of 5.4 percent in the first quarter of this year, its eight consecutive quarter of shrinkage.


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