The Central Bank of Brazil, which has maintained the rate since March when it was cut by 25 basis points, also said economic conditions still call for a stimulative monetary policy and this stimulus will first be phased out if the outlook for inflation or the balance of risks deteriorate.
"The Copom (the monetary policy committee) emphasizes that the next steps in the conduct of monetary policy will continue to depend on the evolution of economic activity, the balance or risks, and on inflation projections and expectations," the central bank said, adding Copom's decision was unanimous.
Brazil's inflation rate eased to 4.19 percent in August from 4.48 percent in July and inflation expectations according to the Focus survey were around 4.1 percent for 2018 and 2019, with those for 2020 around 4.0 percent and those for 2021 around 3.9 percent.
The central bank, which targets inflation of 4.5 percent, plus/minus 1.5 percentage points, said downside risks to inflation stem from a high level of economic slack while upside risks stem from a lack of economic reforms that affect the country's risk premium.
This latter risk would intensify if the economic outlook for emerging economies deteriorates further, the central bank added.
Copom's scenario assumes a path for the Selic rate at 6.5 percent by the end of this year, rising to 8.0 percent by 2019, with an exchange rate of the real ending this year at 3.83 per U.S. dollar and 3.75 end-2019.
Brazil's real has depreciated against the U.S. dollar this year against a backdrop of capital outflows from many emerging markets towards the U.S., where the Federal Reserve is raising rates, and uncertainty over Brazil's presidential elections in October.
The real was little changed in response to today's policy decision with the real trading at 4.13 to the U.S. dollar, down almost 20 percent this year.
The Central Bank of Brazil issued the following statement:
"The Copom unanimously decided to maintain the Selic rate at 6.50% p.a.
The following observations provide an update of the Copom's baseline scenario:
Recent indicators of economic activity point to recovery of the Brazilian economy, at a more gradual pace than envisaged early this year;
The global outlook remains challenging, with reduction of risk appetite towards emerging economies. The main risks continue to be associated with normalization of interest rates in some advanced economies and with uncertainty regarding global trade;
The Committee judges that various measures of underlying inflation are running at appropriate levels. This includes the components that are most sensitive to the business cycle and monetary policy;
Inflation expectations for 2018 and 2019 collected by the Focus survey are around 4.1%. Expectations for 2020 remain around 4.0%, and those regarding 2021 retreated to around 3.9%; and
The Copom's inflation projections in the scenario with interest rate and exchange rate paths extracted from the Focus survey stand around 4.1% for 2018, and 4.0% for 2019. This scenario assumes a path for the policy interest rate that ends 2018 at 6.5% p.a., and 2019 at 8.0% p.a., and a path for the exchange rate that ends 2018 at R$/US$ 3.83, and 2019 at R$/US$ 3.75. In the scenario with a constant interest rate, at 6.50% p.a., and a constant exchange rate, at R$/US$ 4.15*, the projections for 2018 and 2019 stand around 4.4% and 4.5%, respectively.
The Committee emphasizes that risks around its baseline scenario remain in both directions. On the one hand, (i) the high level of economic slack 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 case (iii) the global outlook for emerging economies deteriorates. The Committee judges that the latter risks have increased.
Taking into account the baseline scenario, the balance of risks, and the wide array of available information, the Copom unanimously decided to maintain the Selic rate at 6.50% p.a. The Committee judges that this decision reflects its baseline scenario for prospective inflation and the associated balance of risks and is consistent with convergence of inflation to target over the relevant horizon for the conduct of monetary policy, which includes 2019.
The Copom emphasizes that the evolution of reforms and necessary adjustments in the Brazilian economy is essential to maintain low inflation in the medium and long run, for the reduction of its structural interest rate, and for sustainable economic recovery. The Committee stresses that the perception of continuation of the reform agenda affects current expectations and macroeconomic projections.
The Copom judges that it should base its decisions on the evolution of inflation projections and expectations, of the balance of risks, and of economic activity. Shocks that produce relative price changes should only lead to a monetary policy response to their possible second-round effects (i.e., to the propagation to prices in the economy that are not directly affected by the shock). It is through such second-round effects that these shocks may affect inflation projections and expectations, and change the balance of risks. These effects may be mitigated by the level of economic slack and by inflation expectations anchored around the targets. Therefore, there is no mechanical relationship between recent shocks and the conduct of monetary policy.
The Copom reiterates that economic conditions still prescribe stimulative monetary policy, i.e., interest rates below the structural level. This stimulus will begin to be removed gradually if the outlook for inflation at the relevant horizon for the conduct of monetary policy and/or its balance of risks worsen.
In the Copom's assessment, the evolution of the baseline scenario and of the balance of risks prescribes keeping the Selic rate at its current level. 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, and on inflation projections and expectations.
The following members of the Committee voted for this decision: Ilan Goldfajn (Governor), Carlos Viana de Carvalho, Carolina de Assis Barros, 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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