(Bloomberg) -- Brazil held its benchmark interest rate at a record low and signaled it can cut borrowing costs to help a frail economy once a key austerity measure advances further in Congress.
The bank’s board, led by its President Roberto Campos Neto, on Wednesdaykept the Selic unchanged at 6.50% in a decision expected by all but one of the 39 economists in a Bloomberg survey. Officials have held borrowing costs steady for over a year.
In the statement accompanying the decision, the committee wrote that while the external scenario was less adverse, risks associated with a global economic slowdown remained. Domestically, progress on reforms is “essential” for a fall in structural interest rates and for a sustainable economic recovery, it added.
What Our Economist Says
“While Copom acknowledges that risks to inflation are lower than before, they don’t go as far as to say that they are tilted to the downside. The reference to risks on the reform front as the ‘preponderant risk’ will likely be read by markets as further evidence that Copom is waiting for the pension reform to make a move. We see this statement as consistent with stability of the rate at least in the next Copom meeting, with rising risks of a cut in the second semester.”--Adriana Dupita, Bloomberg’s Latin America economist
Brazilian policy makers have stuck to their cautious stance even as central banks from India to Russia rush to shore up their economies by cutting borrowing costs and the U.S. Federal Reserve signaled it was ready to do the same for the first time since 2008. Growth expectations have plunged and inflation is seen remaining at or below target in the foreseeable future, prompting a surge in investor bets for key rate cuts. Still, a fresh round of political bickering has cast a shadow over the government’s pension reform proposal, which the central bank sees as crucial to keeping a lid on consumer prices.
“The conclusion is that risk related to the reform’s approval is important,” said Gustavo Rangel, chief Latin America economist at ING. “There’s still no green light to lower rates. Reform approval is a precondition for an eventual cut.”
Read more: Why the Future of Brazil’s Economy Rides on Pensions: QuickTake
President Jair Bolsonaro’s administration is seeking to save nearly 1 trillion reais ($259.1 billion) in a decade by toughening access to pension benefits. The flagship bill is currently being debated in a lower house committee and may go to a floor vote by early next month.
Both economists surveyed by the central bank and traders expect policy makers to reduce the Selic to 5.75% by the end of the year. In Wednesday’s statement, the bank board said the balance of inflation risks had evolved favorably and reiterated that Brazil’s economic recovery had been halted.
Policy makers also removed a reference to the “symmetry” of inflation risks, which was a phrase that investors were watching to determine whether or not lower borrowing costs could be on the horizon.
By highlighting the danger of faster inflation if the pension overhaul fails to pass, policy makers may prompt investors to back off wagers of imminent rate cuts, said Flavio Serrano, chief economist at Haitong Bank. The central bank will hold its next rate-setting meeting on July 31.
“The short end of the interest rate future curve may rise a little, given that the central bank put the brakes on bets of a key rate cut in the short-term,” Serrano said. “Lowering borrowing costs now depends on the evolution in the outlook for pension reform approval.”
(Updates lead paragraph, adds economist quote in 5th graph.)
--With assistance from Aline Oyamada and Vinícius Andrade.
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