Wednesday, October 30, 2019

Brazil cuts rate 3rd time, sees more cuts on low inflation

     Brazil's central bank lowered its benchmark Selic interest rate for the third time this year and said a strengthening of the current benign outlook for inflation should allow for another rate cut of the same magnitude.
     The Central Bank of Brazil (BCB) cut its Selic rate by 50 basis points to 5.0 percent and has now cut it by 150 points this year following similar-sized cuts in July, September and today.
     The additional monetary stimulus in major economies amid the global economic slowdown and below-target inflation has generated a favorable outlook for emerging markets, the central bank said, cautioning the outlook still remains uncertain and the risks of a more pronounced slowdown persist.
     After battling inflation that topped 10 percent in 2016, Brazil's inflation rate has fallen steadily to 2.9 percent in September from 3.4 percent in August, below the bank's 2019 target of 4.25 percent, plus/minus 1.5 percentage points.
     The central bank said inflation is at a comfortable level, including those measures that are most sensitive to the business cycle and monetary policy.
     BCB's latest Focus survey of inflation expectations are 3.3 percent for this year, 3.6 percent for next year, 3.75 percent for 2021 and 3.5 percent for 2022.
     The inflation projections used by Copom, the central bank's monetary policy committee, based on the Focus survey, stand around 3.4 percent for 2019, 3.6 percent for 2020 and 3.5 percent for 2021 based the assumption the Selic ends this year at 4.50 percent, remains at that level in 2020 and then rises to 6.38 percent by the end of 2021.
     Although Copom expects to lower its Selic rate further, it said it would be cautious in this stage of the business cycle when considering adding further stimulus and the next steps in its policy stance still depend on economic activity, the balance of risks and on inflation and inflation expectations.
     Nevertheless, Copom said economic conditions still call for stimulative monetary policy, emphasizing the necessity of continuing with economic reforms to allow for a sustainable economic recovery and the reduction of the structural interest rate.


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