Wednesday, April 12, 2017

Brazil cuts rate 100 bps, sees rate at 8.50% end-2017

    Brazil's central bank cut its benchmark Selic rate by 100 basis points to 11.25 percent and said the higher pace of monetary easing was appropriate in light of forecasts that point to a policy rate of 8.5 percent by the end of 2017 with the rate remaining at that level until the end of 2018.
    The Central Bank of Brazil has now cut its rate by 300 basis points since embarking on an easing cycle in October 2016 and by 250 basis points this year alone.
     In October and November last year the central bank cut the rate by 25 basis points each time and then accelerated the pace of easing to 75 points in both January and February this year.
    Copom, the central bank's monetary committee, was unanimous in today's decision to cut the Selic rate by one percentage point and said the future pace of monetary easing would depend on the degree of front loading of rate cuts, economic activity, inflation forecasts and expectations, and the economy's structural interest rate.
     Today's one percentage point rate cut had been expected by many following a decline in March inflation to the lowest rate since 2010 at 4.57 percent, down from 4.76 percent in February.
     Copom said convergence of inflation to its target of 4.5 percent was compatible with its current easing process and economic activity was stabilizing and should gradually recover this year.
    "The disinflation process is more widespread," the central bank said, adding that lower food prices amounted to a favourable supply shock and inflation expectations for 2017 were now around 4.1 percent and 4.5 percent for 2018, and slightly below that level of 2019.
     The central bank's inflation forecast for 2017 and 2018 were now around 4.1 percent and 4.5 percent based on the assumption the policy rate ends 2017 at 8.5 percent and stays at that level.
    The central bank targets inflation of 4.5 percent with a range of plus/minus 1.5 percentage point, a level that is likely to be lowered in June when it is being revised by the government. However, inflation has also overshot the bank's target in the last seven years.
    Brazil's Gross Domestic Product contracted by an annual rate of 2.5 percent in the fourth quarter of last year, the 11th consecutive quarter of shrinking output.
    But Brazil's real has been firming since January last year, following five years of depreciation, and was trading at 3.13 to the U.S. dollar today, up 4.2 percent this year.

     The Central Bank of Brazil issued the following statement:
"The Copom unanimously decided to reduce the Selic rate by one percentage point, to 11.25 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 remains consistent with stabilization of the economy in the short run. Available evidence suggests a gradual recovery of economic activity during the course of 2017;
The global outlook remains quite uncertain. Nevertheless, developments have so far mitigated the effects on the Brazilian economy of possible changes in economic policy in some large economies, notably in the United States. There is uncertainty regarding the sustainability of global economic growth and the stability of current commodity price levels;
Inflation developments remain favorable. The disinflation process is more widespread, and disinflation of IPCA components that are most sensitive to the business cycle and monetary policy has consolidated. Food price disinflation constitutes a favorable supply shock;
Inflation expectations for 2017 collected by the Focus survey are around 4.1%. Expectations for 2018 remain around 4.5%, and expectations for 2019 and longer horizons are slightly below that level; and
The Copom's inflation forecasts for 2017 and 2018 in the scenario with interest rate and exchange rate paths extracted from the Focus survey are around 4.1% and 4.5%, respectively. This scenario assumes a path for the policy interest rate that ends 2017 at 8.5% and remains at that level until the end of 2018.
The Committee emphasizes that its baseline scenario involves risks in both directions: (i) the highly uncertain global outlook might make disinflation more difficult; (ii) the approval and implementation of reforms – notably those of fiscal nature – and of adjustments in the Brazilian economy are important for the sustainability of disinflation and for the reduction of its structural interest rate; (iii) the favorable food-price shock might produce second-round effects and, thus, contribute to additional reductions of inflation expectations and inflation in other economic sectors; and (iv) the recovery of economic activity might be more (or less) gradual and delayed than currently anticipated.
Taking into account the baseline scenario, the balance of risks, and a wide array of available information, the Copom unanimously decided to reduce the Selic rate by one percentage point, to 11.25 percent per year, without bias. This moderate intensification of the pace of monetary easing, relative to the pace set in the January and February Copom meetings, is, at this time, appropriate. The Committee judges that convergence of inflation to the 4.5% target over the relevant horizon for the conduct of monetary policy, which includes 2017 and, with a gradually increasing weight, 2018, is compatible with the ongoing monetary easing process.
The Copom judges that the extension of the monetary easing cycle will depend not only on estimates of the structural interest rate of the Brazilian economy, which the Committee will continue to reassess over time, but also on the evolution of economic activity, on the other aforementioned risk factors, and on inflation forecasts and expectations.
The Copom emphasizes that the pace of monetary easing will depend on the estimated extension of the cycle and on the degree of frontloading. In turn, the latter will depend on the evolution of economic activity, on the other aforementioned risk factors, and on inflation forecasts and expectations. The Committee considers the current pace of easing to be appropriate; however, the current economic context calls for monitoring the developments of the determinants of the degree of frontloading of the cycle.
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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