Brazil Cuts Key Rate to Record Low as Easing Cycle Nears End

Updated on
  • Central bank cuts Brazil’s benchmark Selic rate to 7.00%
  • Board indicated slower pace of monetary easing going forward

Brazil cut its key rate by 50 basis points, bringing benchmark borrowing costs in Latin America’s largest nation to a record low, and signaled a slower pace of easing at its next meeting.

Led by president Ilan Goldfajn, the bank’s board lowered the Selic rate to 7 percent on Wednesday, following a previous 75 basis-point reduction in October. The move was expected by all 49 analysts surveyed by Bloomberg and was the 10th consecutive rate cut in a cycle that’s slashed the benchmark rate by 725 basis points since Oct. 2016. 

"Regarding the next meeting, provided the Committee’s baseline scenario evolves as expected, and taking into account the stage of the monetary easing cycle, at this time the Copom views an additional moderate reduction of the pace of easing as appropriate," central bank board members wrote in a statement. They added that the guidance is "more susceptible to changes" than in previous meetings. The bank’s next meeting is in February.

Goldfajn first indicated in September that the bank was ready to start slowing the pace of key rate cuts, as it nears the end of its biggest easing cycle in a decade. While inflation remains below target, growth is beginning to accelerate and the economy’s capacity stands at 2.3 percent. In addition, the future of a government pension bill that would help contain inflation is in doubt.

"I see an indication of a 25 basis point cut in February, and after that the central bank should stop," according to Flavio Serrano, senior economist at Haitong Bank. "Failure to approve the pension reform, or fiscal changes could alter the scenario."

Investors are watching closely as President Michel Temer’s administration makes an all-out push to secure backing for a pension bill that would save the government around 480 billion reais ($148 billion) over 10 years and help narrow a budget deficit totaling 9 percent of gross domestic product. The government is still far from securing the support needed to pass the measure, lower house speaker Rodrigo Maia said this week, fueling concerns that the reform effort may be abandoned as next year’s election campaign gets underway.

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"This moment is a consequence of the economic measures adopted by our government," Temer wrote on Twitter shortly after the bank’s decision. "We will continue working to make things even better."

Policy makers foresee annual inflation of 4.2 percent in both 2018 and 2019, based on estimates from their weekly economists’ survey, central bankers wrote in the statement published alongside the decision. The official inflation target will remain at 4.5 percent next year and fall to 4.25 percent in 2019.

— With assistance by Rafael Mendes, and Kariny Leal

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