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Brazil to Extend Rate Cuts With Easing Cycle at Cruising Speed

Mario Sergio Lima

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Brazil’s central bank signaled it will stick with the current pace of monetary easing at its next meeting after lowering the key rate by a half point for the third straight time and forecasting inflation below target through 2021.

The bank’s board, led by its President Roberto Campos Neto, on Wednesday lowered the Selic rate to 5%, as expected by all 48 economists in a Bloomberg survey. In a statement published with the decision, policy makers wrote that measures of consumer prices remain at “comfortable levels” even as borrowing costs fall to all-time lows.

The central bank’s monetary policy committee “deems that the consolidation of the benign scenario for prospective inflation should permit an additional adjustment of the same magnitude,” board members wrote. They also recommended “caution when considering possible new changes in the degree of stimulus.”

Policy makers are boosting stimulus at a time when Latin America’s largest economy is weathering a period of weak growth and subdued price pressures. Annual inflation dove below the 2.75% floor of the official target range earlier this month, and investors have also lowered estimates for cost of living increases next year. Meanwhile, an improved global outlook and stronger real further facilitate monetary easing.

“The central bank makes it clear it will cut again in December,” said Simone Pasianotto, chief economist at Reag Investimentos. “They included the reference to ‘caution’ to signal the doors are open in subsequent decisions, when they could either deepen the cycle or stop.”

Since the central bank’s previous policy meeting in September, Brazil’s real has gained roughly 3%, the second best performance among 24 emerging market currencies tracked by Bloomberg. It has been boosted by advances in U.S.-China trade talks and also by growing optimism over the domestic economy.

Last week, Brazil’s Senate gave the final go-ahead to a pension reform that will save government coffers some 800 billion reais ($200 billion) in a decade. Economy Minister Paulo Guedes is expected to introduce a new set of proposals to boost employment and help tame public servant costs.

Read more: Brazil Just Lopped $193 Billion Off Spending But Needs Much More

To be sure, the central bank also acknowledged risks associated with its easing cycle. For the first time, policy makers said the amount of stimulus represents an upside risk for inflation.

What Our Economist Says

“The overall tone of the statement is undeniably dovish, but perhaps fearing that markets could overdo in their optimism, the central bank opted to caution that the effects of the ongoing easing are yet to be seen. Taken together, we believe this indicates the central bank may be considering a pause after bringing the Selic to 4.5% at the next meeting.”--Adriana Dupita, Latin America Economist, Bloomberg Economics

The central bank board reiterated that Brazil’s economic recovery will occur at a gradual pace. Analysts surveyed by the monetary authority expect GDP growth of 0.9% this year and 2% in 2020, down from calls of 2.6% and 2.5%, respectively, in January.

“The fundamentals show there’s room to cut,” said Pasianotto. “Inflation is under control and the economic recovery is still very slow. You need to stimulate consumption.”

(Recasts lead and adds detail from central bank statement throughout)

--With assistance from Rafael Mendes.

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, ;Juan Pablo Spinetto at jspinetto@bloomberg.net, Matthew Malinowski

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