Brazil Central Bank Says Monetary Easing Cycle to Depend on Data

  • Policy makers kept key rate unchanged at 14.25% last week
  • The meeting finished just hours after Senate ousted Rousseff

Brazil’s central bank said policy makers are monitoring all available data to decide when to start easing monetary policy in Latin America’s largest economy.

The central bank board, led by its president Ilan Goldfajn, said in the minutes to its August 30-31 meeting published Tuesday that no specific factor will be determinant by itself to alter monetary policy. Last week the bank kept the benchmark interest rate unchanged at 14.25 percent for the ninth straight meeting in a decision that was in line with forecasts from all 45 analysts surveyed by Bloomberg.

"All of the members of the board showed satisfaction with progress in the disinflation outlook for the Brazilian economy in a relevant horizon for monetary policy," according to the minutes. "At the same time, they showed concern that the 2017 inflation expectations in the Focus survey and the outlook for inflation for the same year in the market scenario are both above 4.5 percent."

The August rate decision capped a tumultuous day in Brazil, where data confirmed that gross domestic product shrank for a sixth straight quarter and the Senate ousted Dilma Rousseff in a presidential impeachment trial. Her successor, Michel Temer, nominated Goldfajn in May this year when he temporarily took over the presidency, pledging to rebuild confidence and contain consumer price increases.

For an in-depth look at Brazil’s monetary policy, click here.

Temer’s team has already made some inroads on the inflation rate, which decreased by almost 2 percentage points since the start of the year to 8.74 percent in July. While that’s still almost double the government target of 4.5 percent, analysts surveyed last week by the central bank forecast it will fall further to 7.34 percent this year and 5.12 percent next.

The analysts say that will give Goldfajn the space he needs to reduce borrowing costs by more than 3 percentage points in 2017. The question now is when he will start cutting.

Policy makers signaled in the communique published after their decision they’re in no rush to decrease the key rate just yet, saying they need to have greater confidence of hitting the inflation target. Yet they sent swap rates tumbling by tweaking the language of the statement, dropping a sentence that said there was “no room” for monetary easing. Yields paid on contracts maturing in January 2018 fell 19 basis points the day after the meeting.

The central bank has only two regularly-scheduled meetings left for 2016: October 18-19 and November 29-30. If it cuts the rate, it will be the first reduction in more than four years.

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