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Brazil’s central bank opened the door to more interest rate cuts as it signaled that the outbreak of the new coronavirus creates a bigger risk of an economic slowdown than of a spike in inflation.
Policy makers said in a statement late on Tuesday that they’re closely monitoring the effects of the epidemic on financial markets and on the wider economy. Its impact on Brazil’s economy is a greater threat than a possible deterioration in asset prices, they added.
“The central bank left the door wide open for new rate cuts, a door that had been temporarily closed in their last meeting,” said Andre Perfeito, chief economist at Necton Investimentos. “I see two additional cuts of 50 basis points this year which may leave us with negative real interest rates.
Read More: Brazil’s GDP Estimates Cut by GS on Coronavirus
Swap rates fell on Wednesday as investors priced in at least a quarter-point cut to the benchmark Selic rate, currently at an all-time low of 4.25%. The Brazilian real was little changed after closing Tuesday at a record low, which could potentially fuel future inflation.
Waiting Longer
Hours after an emergency rate cut by the U.S. Federal Reserve, Brazilian policy makers suggested they will wait until their next monetary policy meeting on March 18 to decide whether to change the benchmark Selic rate.
“The central bank emphasizes that the next weeks will allow for a better evaluation of the effects of the coronavirus outbreak on the path for prospective inflation,” it added in the statement.
Read More: Fed Rate Cut Is Pressuring Brazil’s Central Bank to Backtrack
Brazil last cut the policy rate by a quarter percentage point on Feb. 5, and suggested that it had ended its record-breaking monetary easing cycle.
(Updates with swap rates showing bets for future rate cuts in fourth paragraph.)
To contact the reporter on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net
To contact the editors responsible for this story: Walter Brandimarte at wbrandimarte@bloomberg.net, Matthew Bristow
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