Brazil maintains rate but strikes more dovish tone

February 6, 2019

     Brazil’s central bank left its benchmark Selic rate unchanged at 6.50 percent, as expected, but struck a more dovish tone by saying it now expects its key rate to remain unchanged this year, based on the latest survey of market expectations, compared with December’s forecast for the rate to rise by 1 percentage point to 7.5 percent.
     Tempering this move toward easier policy, the Central Bank of Brazil, which has kept its rate steady since March 2018, added Copom’s (the monetary policy committee) forecast for the Selic rate in 2020 was unchanged at 8.0 percent.
     Copom emphasized future monetary policy will depend on economic activity, the balance of risks and inflation projection and expectations, and “caution, serenity and perseverance” in policy decisions have been instrumental in keeping the path of inflation moving toward the target of 4.5 percent, plus/minus 1.5 percentage points.
     Underscoring the softer tone of Copom’s statement, it said the risks around its baseline scenario of a gradual recovery of Brazil’s economy were asymmetrical due to the increased risks of a slowdown in global growth from several uncertainties, such as trade conflicts and Brexit.
     As a result of the deteriorating outlook for global growth, the central bank said the risks to inflation had also moderated and overall economic conditions still call for monetary stimulus.
     The latest Focus survey pointed to expectations for inflation this year of around 3.9 percent, 4.0 percent in 2020 and 3.75 percent for 2021. This is down from the previous survey’s expectations for inflation this year of 4.1 percent, but unchanged for 2020 and 2021.
     Today’s decision by Brazil’s central bank was likely the last under outgoing President Ilan Goldfajn whose successor, Roberto Campos Neto, is expected to face confirmation hearings later this month.
     Under Goldfajn Brazil’s inflation rate has steadily declined to 3.75 percent in December from over 10 percent in early 2016 while the exchange rate of the real has stabilized in recent months after falling in the first half of 2018.
     The real was trading at 3.70 to the U.S. dollar today, up 4.9 percent this year due to optimism over economic reforms.

     The Central Bank of Brazil issued the following statement:

“The Copom unanimously decided to maintain the Selic rate at 6.50% p.a.
The following observations provide an update of the Copom’s baseline scenario:
Recent data on economic activity continue to indicate gradual recovery of the Brazilian economy;
The global outlook remains challenging, despite some decline in risks and a change in composition. On the one hand, short-term risks associated with normalization of interest rates in some advanced economies have receded. On the other hand, there was an increase in risks related to a slowdown in global growth, as a result of several uncertainties, such as trade conflict and Brexit.
The Committee judges that various measures of underlying inflation are running at appropriate or comfortable levels. This includes the components that are most sensitive to the business cycle and monetary policy;
Inflation expectations for 2019, 2020 and 2021 collected by the Focus survey are around 3.9%, 4.0% and 3.75%, respectively; and
The Copom’s inflation projections in the scenario with interest rate and exchange rate paths extracted from the Focus survey stand around 3.9% for 2019 and 3.8% for 2020. This scenario assumes a path for the Selic rate that ends 2019 at 6.5% p.a. and increases to 8.0% p.a. over the course of 2020. It also assumes a path for the exchange rate that ends 2019 at R$/US$ 3.7, and 2020 at R$/US$ 3.75. In the scenario with a constant interest rate, at 6.5% p.a., and a constant exchange rate, at R$/US$ 3.70*, the projections for 2019 and 2020 stand around 3.9% and 4.0%, respectively.
The Committee emphasizes that risks around its baseline scenario remain in both directions, but with larger weight on the last two risks, thus with asymmetry.  On the one hand, (i) the high level of economic slack may lead to a lower-than-expected prospective inflation trajectory. On the other hand, (ii) frustration of expectations regarding the continuation of reforms and necessary adjustments in the Brazilian economy may affect risk premia and increase the path for inflation over the relevant horizon for the conduct of monetary policy. This risk intensifies in case (iii) the global outlook for emerging economies deteriorates. The Committee judges that, since its previous meeting, notably related to the global outlook, inflationary risks have moderated.
Taking into account the baseline scenario, the balance of risks, and the wide array of available information, the Copom unanimously decided to maintain the Selic rate at 6.50% p.a. The Committee judges that this decision reflects its baseline scenario for prospective inflation and the associated balance of risks, and is consistent with convergence of inflation to target over the relevant horizon for the conduct of monetary policy, which includes 2019 and, with a smaller and gradually increasing weight, 2020.
The Copom reiterates that economic conditions prescribe stimulative monetary policy, i.e., interest rates below the structural level.
The Copom emphasizes that the evolution of reforms and necessary adjustments in the Brazilian economy is essential to maintain low inflation in the medium and long run, for the reduction of its structural interest rate, and for sustainable economic recovery. The Committee stresses that the perception of continuation of the reform agenda affects current expectations and macroeconomic projections.
In the Copom’s assessment, the evolution of the baseline scenario and of the balance of risks prescribes keeping the Selic rate at its current level. The Copom emphasizes that the next steps in the conduct of monetary policy will continue to depend on the evolution of economic activity, the balance of risks, and on inflation projections and expectations.
The Copom asserts that caution, serenity, and perseverance in monetary policy decisions, even in the face of volatile scenarios, have been instrumental in pursuing its primary objective of keeping the inflation path towards the targets.
The following members of the Committee voted for this decision: Ilan Goldfajn (Governor), Carlos Viana de Carvalho, Carolina de Assis Barros, Maurício Costa de Moura, Otávio Ribeiro Damaso, Paulo Sérgio Neves de Souza, Sidnei Corrêa Marques, and Tiago Couto Berriel.”


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