Extent of Brazil Easing Cycle Is Limited, Central Bank Says

  • Brazil economy below expectations in short term, BCB says
  • Central bank cites remaining uncertainties on fiscal policy

Brazil’s inflation projections allow for gradual and moderate interest rate cuts but indicate a limit to the extent of the easing cycle, the country’s central bank said on Tuesday.

Fiscal adjustments have made more progress than expected in Congress but continue to represent a risk, according to the minutes of the central bank published on its website.

The bank’s board said that inflation projections in 2017 and 2018 allow for a “gradual and moderate” easing of monetary policy. Policy makers led by president Ilan Goldfajn also wrote in the minutes to their Oct. 18-19 meeting that “projections in the market scenario suggest limits to the magnitude of the flexibilization in the same horizon.”

Interest-rate futures rose as traders continued to unwind bets on more aggressive rate cuts. Swap rates on the contract maturing in January 2018 rose 6 basis points to 12.22 percent in early trading.

“Since the rate cut cycle is a given, the central bank is being cautious and adopting a more hawkish tone,” said Jason Vieira, chief economist at Infinity Asset Management. “They will probably cut a quarter point in November unless they see further advances in the approval of the spending cap bill; they are putting the ball in Congress’s court”.

In a major turning point, the central bank last week cut its benchmark interest rate for the first time since 2012. With inflation running at 10.67 percent at the end of last year, the bank had kept the Selic at a 10-year high even as the country plunged into its deepest recession on record.

Although a majority of analysts predicted the quarter-point cut to 14 percent, the tone set by the statement accompanying the decision reinforced doubts that remain over the approval of austerity measures in Congress and the persistence of services inflation. The cautious statement prompted traders to pare back their bets for a more aggressive rate-cutting cycle.

Since then, consumer price increases in September were the lowest in two years, prompting analysts in the central bank’s weekly survey to reduce their inflation estimates to 6.89 percent for 2016 and to 5 percent for 2017, still above the bank’s 4.5 percent target. Brazil’s cost of living in the 12 months through mid-October was 8.27 percent.

Later on Tuesday the lower house of Congress is scheduled to hold a second-round vote on a constitutional amendment to cap increases in public spending, one of the key measures the central bank is monitoring. If approved, the bill would be sent to the Senate.

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