Wednesday, October 25, 2017

Brazil cuts rate 75 bps, sees slightly slower easing pace

      Brazil's central bank cut its benchmark Selic rate by 75 basis points to 7.50 percent, as widely expected, and said a "moderate reduction" in the pace of easing would be appropriate at the next meeting provided the economy evolves as expected.
      Today's 75-point cut follows the Central Bank of Brazil's guidance in September that it would slow down the pace of easing.
      The reference to a further moderate reduction signals that the next rate cut in December could be 50 or 25 basis points.
       The central bank's monetary policy committee, known as Copom, said it was unanimous in today's decision and its baseline scenario assumes a policy rate that ends this year and next year at 7.0 percent before rising to 8.0 percent during 2019.
        In September Copom forecast the Selic rate would end at 7.25 percent this year. Copom next meets on Dec. 6.
       The central bank has now cut its rate by 675 basis points since embarking on an easing cycle in October 2016 and by 625 basis points this year on seven occasions, including four consecutive cuts of 100 basis points from April to September.
       Brazil's inflation rate rose slightly to 2.54 percent in September from 2.46 percent in August, the lowest since February 1999, with the general inflation scenario largely in line with the central bank's expectation and at a "comfortable" level.
       The latest central bank survey of inflation expectations show a decline to around 3.1 percent for 2017 and 4.0 percent for 2018, with expectations for 2019 and 2020 around 4.25 percent and 4.0 percent, respectively.
       Based on this survey, Copom said its own projections call for inflation around 3.3 percent this year, 4.3 percent in 2018 and 4.2 percent in 2019. Copom targets inflation of 4.5 percent. In its quarterly inflation report from September the central bank forecast 3.2 percent inflation for this year and 4.3 percent for 2018.
       The central bank said its baseline scenario involves risks in both directions, with lower-than-expected inflation possible due to second-round effects from low food and industrial goods inflation.
       But inflation may also be higher than expected if expectations of further economic reforms are frustrated, pushing up the risk premia of the country and thus inflation.
       Brazil's economy has pulled out of almost three years of recession with Gross Domestic Product in the second quarter expanding by an annual rate of 0.3 percent, the first annual growth rate since the first quarter of 2014.
      In September the central bank forecast 0.75 percent growth this year, up from an earlier estimate of 0.5 percent, with growth rising to 2.2 percent in 2018.

      The Central Bank of Brazil issued the following statement:

"The Copom unanimously decided to reduce the Selic rate by 0.75 percentage point, to 7.50 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 exerting excessive pressure on financial conditions in advanced economies. This supports risk appetite towards emerging economies;
The Committee judges that its baseline inflation scenario has evolved as expected. Inflation developments remain favorable, with various measures of underlying inflation running at comfortable levels. This includes the components that are most sensitive to the business cycle and monetary policy;
Inflation expectations collected by the Focus survey retreated to around 3.1% for 2017 and 4.0% for 2018. Expectations for 2019 and 2020 are around 4.25% and 4.0%, respectively; and
The Copom's inflation projections in the scenario with interest rate and exchange rate paths extracted from the Focus survey stand around 3.3% for 2017, 4.3% for 2018, and 4.2% for 2019. This scenario assumes a path for the policy interest rate that ends 2017 and 2018 at 7.0%, and increases to 8.0% during the course of 2019.
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 favorable food price shock and of low current levels of industrial goods inflation, and (ii) the possible propagation through inertial mechanisms of low inflation levels 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 (iv) a 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 0.75 percentage point, to 7.50 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 and 2019, 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 and necessary 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 evolution of the baseline scenario, in line with expectations, and the stage of the monetary easing cycle made it appropriate to reduce the Selic rate by 0.75 percentage point at this Copom meeting. Regarding the next meeting, provided the Committee's baseline scenario evolves 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. 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), Carlos Viana de Carvalho, Isaac Sidney Menezes Ferreira, Maurício Costa de Moura, Otávio Ribeiro Damaso, Paulo Sérgio Neves de Souza, Reinaldo Le Grazie, Sidnei Corrêa Marques e Tiago Couto Berriel."


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