Brazil Cements Pledge for Aggressive Easing to Help Recovery

  • BCB leaves door open to change in pace of easing:Goldman Sachs
  • Policy makers cut benchmark Selic by most in nearly 8 years

Brazil’s central bank signaled further aggressive key rate cuts are in store after slashing borrowing costs by the most in nearly eight years to help boost growth.

Policy makers led by central bank President Ilan Goldfajn on Wednesday voted unanimously to reduce the benchmark rate by a full percentage point to 11.25 percent following two 75 basis-point cuts. The monetary authority has lowered borrowing costs 300 basis points since beginning the easing cycle in October.

"This moderate intensification of the pace of monetary easing, relative to the pace set in the January and February Copom meetings, is, at this time, appropriate," bank officials wrote in the statement accompanying the rate decision. They reiterated that the disinflation process is more widespread, and that food prices are providing a favorable supply shock.

President Michel Temer’s efforts to jump-start the economy still have yet to impact Brazilians as unemployment surges to record highs and growth estimates tumble on stagnant demand. With inflation set to fall below target this year, the central bank left the door open for another acceleration in the pace of rate cuts, according to Alberto Ramos, Goldman Sachs’ chief Latin America economist.

"The Copom is not wedded to the current pace of easing," Ramos wrote in a research note. "If the Copom changes the magnitude of rate cuts in the near term, it is more likely to be in the direction of higher rather than lower cuts."

Swap rates on the contract maturing in July 2017, the most traded in Sao Paulo, rose 2 basis points to 10.75 percent at 9:35 a.m. local time on Thursday.

Read more: Bloomberg QuickTake on Brazil’s Slump, Scandal and Turmoil

The monetary authority is expected to lower the key rate to 8.5 percent by year-end and hold it at that level throughout 2018. That would be the biggest easing cycle since policy makers cut the Selic to 11.25 percent from 19.75 percent in the two years through September 2007. Still, analysts surveyed by the central bank forecast economic growth of just 0.41 percent in 2017 after two years of recession.

Commenting on the rate decision on his Twitter account, Temer said the borrowing cost reduction will help speed up the country’s economic growth and generate jobs. He also said slowing inflation and a lower Selic will stimulate consumption and industrial production.

The worst recession on record has helped to cut annual inflation by roughly half in the past 12 months, to 4.57 percent in March. Consumer prices may fall below the central bank’s 4.5 percent target as soon as this month.

Moments after the Selic decision, state-backed lender Banco do Brasil cut rates on some mortgages, car loans and working capital for companies. Private banks Itau and Bradesco also lowered rates on some types of loans.

“The central bank is clearly comfortable with inflation, and the economy is very weak," Andre Perfeito, chief economist at Gradual Cctvm, said by phone. "The central bank doesn’t rule out the chances of a larger cut."

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