However, the Central Bank of Brazil added this expectation for the May 16 meeting of its policy committee, known as Copom, could change if further easing is unnecessary.
Beyond the May meeting, Copom said it "deems it appropriate to interrupt the monetary easing process," while it evaluates the next steps, barring changes to its forecast and the balance of risks.
Today's rate cut was expected by analysts after inflation in February eased further to 2.84 percent from January's 2.86 percent, below its target of 4.5 percent, plus/minus 1.5 percentage points.
Prior to the release of the latest data, Copom in February said it would pause in its easing campaign though it didn't completely shut the door on further cuts by saying it could change its view if the balance of risks changed along with inflation and inflation forecasts.
"The Committee judges that its baseline inflation scenario has evolved in a more benign fashion than expected since the turn of the year," Copom said, adding its projections for inflation this year based on the Focus survey now stand at 3.8 percent for this year and 4.1 percent for 2019.
This compares with its forecast from February for 2018 and 2019 inflation of 4.2 percent.
Reflecting today's rate cut, the central bank assumed that the policy rate would end this year at 6.50 percent and then rise to 8.0 percent by the end of 2019.
Brazil's central bank has now cut its rate 7.75 percentage points since embarking on an easing cycle in October 2016.
The Centra Bank of Brazil issued the following statement:
"The Copom unanimously decided to reduce the Selic rate by 0.25 percentage point, to 6.50 percent per year.
The following observations provide an update of the Copom's baseline scenario:
The set of indicators of economic activity shows consistent recovery of the Brazilian economy;
The global outlook has been favorable, as economies grow worldwide. This has so far contributed to support risk appetite towards emerging economies;
The Committee judges that its baseline inflation scenario has evolved in a more benign fashion than expected since the turn of the year. 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 for 2018 collected by the Focus survey are around 3.6%. Expectations for 2019 and 2020 are around 4.2% 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 3.8% for 2018, and 4.1% for 2019. This scenario assumes a path for the policy interest rate that ends 2018 at 6.5%, and 2019 at 8.0%.
The Committee emphasizes that risks around its baseline scenario remain in both directions. On the one hand, (i) possible propagation through inertial mechanisms of low inflation levels may lead to a lower-than-expected prospective inflation trajectory. On the other hand, (ii) 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 (iii) 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 0.25 percentage point, to 6.50 percent per year. The Committee judges that this decision is consistent with convergence of inflation to target over the relevant horizon for the conduct of monetary policy, which includes 2018 and, with gradually increasing weight, 2019.
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 made it appropriate to reduce the Selic rate by 0.25 percentage point at this Copom meeting. Regarding the next meeting, at this time the Copom views an additional moderate monetary easing as appropriate. The Committee judges that this additional stimulus mitigates the risk of delayed convergence of inflation toward the targets. This view regarding the next Copom meeting might change in favor of the interruption of the monetary easing process, if risk mitigation proves unnecessary. Beyond the next meeting, absent relevant additional changes to the baseline scenario and balance of risks, the Copom deems appropriate to interrupt the monetary easing process, with the aim of evaluating next steps, in light of the relevant horizon for monetary policy at that time. The Copom emphasizes that the next steps in the conduct of monetary policy 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 projections 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 and Tiago Couto Berriel."
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