(Bloomberg) -- Brazil’s central bank signaled it will spare no effort in helping Latin America’s largest economy ride out a historic blow from the coronavirus pandemic following Wednesday’s larger-than-expected interest rate cut.
The bank’s board, led by its President Roberto Campos Neto, cut the Selic by three-quarters of a point to a record low 3% in a move that was forecast by eight of 37 analysts in a Bloomberg survey and was bigger than estimates from the remaining 29. In an accompanying statement, policy makers wrote the dire growth outlook requires an “unusually large monetary stimulus.“
For the next meeting, “the Committee considers a final monetary adjustment, not larger than this one, to complete the change to the policy rate that it deems adequate to counteract the economic consequences from the COVID-19 pandemic.” The central bank has now cut rates in each of its past seven meetings.
Brazil joins peers from Mexico to the Philippines in pumping more monetary stimulus amid a rapidly worsening outlook. The virus has undercut demand by crushing confidence and also hurt supply by closing factories. Analysts expect the economy posted deflation in April, and that consumer prices will end this year at least half a percentage point below the floor of the target range.
“It was a bold and decisive move, not only because of the magnitude of the cut but also the forward guidance suggesting another reduction at the next meeting,” said Alberto Ramos, chief Latin America economist at Goldman Sachs.
On April 20, Campos Neto underscored a sharp downturn in growth prospects while saying low borrowing costs can still stimulate the economy. Organizations such as the International Monetary Fund expect Brazil’s economy to shrink 5.3% as the unemployment rate approaches 15%.
Brazil’s economic contraction will be significantly deeper than previously forecast, the bank board wrote in its statement. Indeed, industrial production plunged more than expected in March and returned to levels not seen since 2003, according to a release on Tuesday. The nation’s GDP is likely to post a double-digit decline in the second quarter, according to Luciano Rostagno, chief strategist at Banco Mizuho do Brasil.
To be sure, risks to further easing still remain. Policy makers are faced with the challenge of navigating a fresh bout of political tensions which include criminal accusations against President Jair Bolsonaro, the departure of two of his key ministers and pressure for permanent spending increases.
Read more: Brazil’s Economy Chief Fights Back to Keep Control Over Budget
“The Committee believes that the fiscal trajectory over the next year, as well as the perception of its sustainability, will be crucial to determine the length of the stimulus,” board members wrote in their statement.
What Our Economist Says
“The BCB’s communication shows policymakers in a dilemma -- their updated, more realistic forecasts indicate the need for much lower rates but can’t afford to move swiftly because of existing fiscal risks. We believe the BCB is aiming at an additional 75bps rate cut in June to 2.25%, but we expect markets will bet against this new forward guidance and price in odds of further easing ahead. Although our base case is stability at 2.25%, we can’t rule out further easing, specially if the April economic activity data confirms the dire picture outlined by the plunge in confidence, mobility and electricity consumption.”
--Adriana Dupita, Latin America economist, Bloomberg Economics
That tension helped the real smash through its own record low on Wednesday in a trend that may fan price pressures by making imports more expensive. Further declines in the currency will be on tap as markets react to the rate decision, said Solange Srour, chief economist at ARX Investimentos.
“It seems they’re not that worried with the latest fiscal developments and the weakening of the real,” Srour said. “That’s a mistake. Copom is unnecessarily risking a flight of resources from Brazil.”
Still, there’s no doubt that coronavirus’ full economic hit is still yet to come. Large cities in Brazil’s north and northeast are toughening restrictions on movement and commerce in efforts to slow the spread of the virus, and the country’s financial hub, Sao Paulo, may follow suit.
“The central bank is comfortable cutting to help drive the recovery in demand following the crisis,” said Rostagno. “They are focused more on that than preventing a recession now.”
(Updates with comment from central bank’s board in third paragraph.)
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