Wednesday, September 6, 2017

Brazil cuts rate 100 bps for 4th time but to slow pace

      Brazil's central bank cut its benchmark Selic interest rate by 100 basis points for the fourth time in a row but said it would slow down the pace of easing at its next policy meeting and is looking toward a gradual ending of the monetary easing cycle.
       The Central Bank of Brazil has now cut its policy rate by 600 basis points since embarking on the easing cycle in October 2016 and by 550 points this year on six different occasions. Today's rate cut was widely expected by economists.
      The bank's Selic rate now stands at 8.25 percent and the decision by the bank's monetary policy committee, known as Copom, was unanimous and without a bias.
       Copom said the current scenario includes the Selic rate ending at 7.25 percent by the end of this year, down from July's forecast of 8.0 percent and implying the key rate will be lowered by another 1 percentage point in coming months. Copom next meets Oct. 25.
       Copom expects the Selic rate to fall further to 7.0 percent in early 2018 but then rise to 7.5 percent by the end of next year. In July the central bank saw Selic remaining at 8.0 percent through 2018.
       Last week the central bank's survey showed that economists had lowered estimates for the Selic rate to end the year at 7.25 percent from 7.50 percent while 2018 estimates remained at 7.50 percent for the third week in a row.
       Recent economic data are consistent with a gradual recovery of Brazil's economy, the bank said, adding the global outlook and the outlook for inflation are favorable.
      Brazil's economy has finally begun to pull out of its worst ever recession with its Gross Domestic Product expanding for the second quarter in a row as household spending rose for the first time in over two years. Government spending and investments, however, continued to decline.
      GDP grew by 0.2 percent in the second quarter following 1.0 percent in the first quarter, the first quarterly expansions since 2015. On an annual basis, the economy grew by 0.3 percent for the first annual growth since the first quarter of 2014.
      Inflation, meanwhile, remains well below the central bank's target range and at the lowest seen since February 1999.  In June the government lowered the inflation target for 2019 to 4.25 percent and to 4.00 percent for 2020 while retaining the 1.5 point range.
       In August inflation fell to 2.46 percent from 2.71 percent in July compared with the central bank's target range of 4.5 percent, plus/minus 1.5 percentage points, as food and beverage prices fell further due to a strong harvest.
      The fall in inflation bolstered expectations the central bank would continue to cut rates by another 100 basis points today and triggered further reductions in rate expectations.
     After depreciating from mid-2014 through most of 2015, Brazil's real started firming in February 2016 and has continued to slowly rise since then. Today the real was trading at 3.1 to the U.S. dollar, up 5 percent since the start of the year.

     The Central Bank of Brazil issued the following statement:

"The Copom unanimously decided to reduce the Selic rate by one percentage point, to 8.25 percent per year, without bias.
The following observations provide an update of the Copom's baseline scenario:
The set of indicators of economic activity released since the last Copom meeting is consistent with a gradual recovery of the Brazilian economy;
The global outlook has been favorable, as global economic activity remains on a gradual recovery path, without pressuring financial conditions in advanced economies. This supports risk appetite towards emerging economies;
Inflation developments remain favorable, with various measures of underlying inflation running at low levels. This includes the components that are most sensitive to the business cycle and monetary policy;
Inflation expectations collected by the Focus survey edged up to around 3.4% for 2017 and remained around 4.2% for 2018. Expectations for 2019 are around 4.25%, and expectations for 2020 are around 4.00%; and
The Copom's inflation projections in the scenario with interest rate and exchange rate paths extracted from the Focus survey retreated to around 3.3% for 2017, and increased to around 4.4% for 2018. This scenario assumes a path for the policy interest rate that ends 2017 at 7.25%, edges down to 7.00% in early 2018 and reaches 7.5% by the end of the year.
The Committee emphasizes that its baseline scenario involves risks in both directions. On the one hand, the combination of (i) possible second-round effects of the ongoing favorable food price shock and of low current levels of industrial goods inflation, and (ii) the possible propagation through inertial mechanisms of the low level of current inflation, including the components that are most sensitive to the business cycle and monetary policy, may lead to a lower-than-expected prospective inflation trajectory. On the other hand, (iii) frustration of expectations regarding the continuation of reforms and necessary adjustments in the Brazilian economy may affect risk premia and increase the path for inflation over the relevant horizon for the conduct of monetary policy. This risk intensifies in the case of a (iv) reversal of the current benign global outlook for emerging economies.
Taking into account the baseline scenario, the balance of risks, and the wide array of available information, the Copom unanimously decided to reduce the Selic rate by one percentage point, to 8.25 percent per year, without bias. The Committee judges that convergence of inflation to the 4.5% target over the relevant horizon for the conduct of monetary policy, which includes 2018, is compatible with the monetary easing process.
The Committee judges that economic conditions prescribe accommodative monetary policy, i.e., interest rates below the structural level.
The Copom emphasizes that the evolution of reforms, such as the recently approved credit policy measures, and adjustments in the Brazilian economy contributes to the reduction of its structural interest rate. The Committee will continue to reassess estimates of this rate over time.
The Copom emphasizes that economic conditions have allowed the same pace of monetary easing at this meeting. Regarding the next Copom meeting, provided the Committee’s baseline scenario evolve as expected, and taking into account the stage of the monetary easing cycle, at this time the Copom views a moderate reduction of the pace of easing as appropriate. In addition, under those same circumstances, the Copom foresees a gradual ending to the cycle. Notwithstanding these perspectives, the Copom emphasizes that the monetary easing process will continue to depend on the evolution of economic activity, the balance of risks, possible reassessments of the extension of the cycle, and on inflation forecasts and expectations.
The following members of the Committee voted for this decision: Ilan Goldfajn (Governor), Anthero de Moraes Meirelles, Carlos Viana de Carvalho, Isaac Sidney Menezes Ferreira, Luiz Edson Feltrim, Otávio Ribeiro Damaso, Reinaldo Le Grazie, Sidnei Corrêa Marques, and Tiago Couto Berriel."




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