Brazil Surprises With Deep Rate Cut, Signals New Easing Pace

  • Bank cuts by 75 basis points, says inflation moving to target
  • Crippling recession weighs on industry, drives unemployment

Win Thin on Brazil Rate Cut, Austerity

Brazil slashed its benchmark interest rate in a surprisingly aggressive move, as policy makers ratcheted up their efforts to jumpstart the country’s shrinking economy.

The central bank board, led by President Ilan Goldfajn, unanimously voted on Wednesday to lower the benchmark Selic rate by three quarters of a point to 13 percent -- a move that was predicted by just four of 48 analysts in a Bloomberg survey. Most of them expected a 50-basis-point cut.

In a strong message to start 2017, the bank said inflation appears to be converging to target and growth remains weaker than expected. The cut was the deepest yet of the current easing cycle, which began in October last year. While inflation has hit its slowest level in over two and a half years, high debt levels and waning confidence among both businesses and consumers still hinder the recovery of an economy mired in deep recession.

Under pressure to act more aggressively, the central bank said in a statement accompanying the decision that it had established a "new rhythm of easing" given the anchoring of inflation expectations, widespread disinflation and economic activity that remains short of expectations.

President Michel Temer expressed his "satisfaction" with the bank’s decision, according to the presidential spokesman, Alexandre Parola. The cut "reinforces the president’s conviction that the elements are in place for a recovery of economic growth and the creation of new jobs in the course of this year," he said.

Investors also welcomed the bank’s decision, with the iShares MSCI Brazil Capped ETF rising as much as 2.6 percent after the announcement. Swap rates in contracts maturing in Jan. 2018 fell 37 basis points on Thursday morning as traders began pricing in some three additional Selic cuts of 75 basis points this year.

"The bank indicates it should keep this pace of easing for at least the next two meetings," Andre Perfeito, chief economist at Gradual Cctvm, wrote in a research note. "It is reasonable to imagine that we can have a key rate very close to one digit by the end of this year."

Consumer prices rose 6.29 percent last year, compared with 10.67 percent in 2015, the national statistics institute said in a separate report earlier on Wednesday. The inflation slowdown has been sharper and more widespread than anticipated.

The central bank "made it very clear that it sees a better inflation and exchange rate outlook and worse activity which made them opt for a more aggressive cut," said Luciano Rostagno, chief strategist at Banco Mizuho, in an interview after the decision.

"The bank is setting a new rhythm for rate cuts and it will continue unless some unfavorable factor arises," he said, citing as an example a possible depreciation in the value of the real after U.S. President-elect Donald Trump takes office.

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