Wednesday, July 26, 2017

Brazil cuts rate 100 bps again, lowers inflation forecast

     Brazil's central bank cut its benchmark Selic rate by 100 basis points for the third time in a row and said a continuation of this pace of monetary easing in September would depend on how economic activity evolves, the balance of risks as well as inflation and inflation forecasts.
     The Central Bank of Brazil has now cut its policy rate by 500 basis points since beginning its easing campaign in October 2016 and by 450 basis points this year. The rate now stands at 9.25 percent.
      Copom, the central bank's monetary committee, was unanimous in its decision and lowered its assumption for the Selic policy rate to end this year at 8.0 percent from the May forecast of 8.50 percent. As in May, Copom expects the Selic rate to remain at that level until the end of 2018.
    "Inflation developments remain favorable," the central bank said, adding disinflation is widespread and so far the short-run effects of uncertainty surrounding government reforms was neither inflationary, nor disinflationary.
     Today's one percentage point cut in the Selic rate comes after the central bank at its previous meeting in May said a smaller cut was likely appropriate in July.
      But Copom said economic conditions were continuing to allow for the same pace of easing as in May and April despite an increase in uncertainty as far as economic reforms.
      Copom's 2017 inflation forecast based on its weekly Focus survey dropped to 3.6 percent from May's forecast of 4.0 percent. For 2018 Copom forecast inflation of 4.3 percent as inflation expectations dropped to 3.3 percent this year and 4.2 percent next year.
     Brazil's inflation rate dropped to 3.0 percent in June from 3.6 percent in May for the lowest rate since April 2007 and at the lower boundary of its inflation target of 4.5 percent, plus/minus 1.5 percentage points.
     Brazil's real has been trending firmer this year after depreciating steadily the previous six years.
     The real was trading at 3.14 to the U.S. dollar today, up 3.8 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 9.25 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 Brazilian economy in the short run and gradual recovery. The recent increase in uncertainty regarding the evolution of reforms and adjustments in the economy had a negative impact on confidence indices. However, available information suggests that the impact of this drop in confidence on economic activity has been limited so far;
The global outlook has been favorable, as global economic activity remains on a gradual recovery path, without pressuring financial conditions in developed economies. This has contributed to support risk appetite towards emerging economies. In addition, changes in economic policy in some central economies have become less likely;
Inflation developments remain favorable. Disinflation is widespread and includes IPCA components that are most sensitive to the business cycle and monetary policy. So far, the short-run effects of higher uncertainty regarding the evolution of reforms and adjustments in the economy have been neither inflationary nor disinflationary;
Inflation expectations collected by the Focus survey for 2017 and 2018 fell to around 3.3% and 4,2%, respectively. Expectations for 2019 are around 4.25%, and expectations for 2020 are around 4.00%; and
The Copom's inflation projections for 2017 and 2018 in the scenario with interest rate and exchange rate paths extracted from the Focus survey retreated to around 3.6% and 4.3%, respectively. This scenario assumes a path for the policy interest rate that ends 2017 at 8.0% and remains at that level until the end of 2018.
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 9.25 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 Copom emphasizes that the extension of the monetary easing cycle will depend on cyclical factors and on estimates of the structural interest rate of the Brazilian economy. The Committee judges that the evolution of reforms and adjustments in the economy (especially those that pertain to fiscal and credit policies) is important for the reduction of estimates of the structural interest rate. The Committee will continue to reassess these estimates over time.
The Copom emphasizes that, despite the increase in uncertainty regarding the evolution of reforms and adjustments in the economy, the continuation of economic conditions so far has allowed the same pace of monetary easing at this meeting. Regarding the next Copom meeting, maintenance of this pace will depend on the continuation of conditions described in the Committee's baseline scenario and on estimates of the extension of the monetary easing cycle. The pace of easing 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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