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Brazil Cuts Rates to 3.75% With Recession Likely After Virus

Matthew Malinowski
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Brazil Cuts Rates to 3.75% With Recession Likely After Virus

(Bloomberg) -- Brazil cut its benchmark interest rate by half a point to a record low in a bid to mitigate the effects of the coronavirus pandemic that’s likely to push Latin America’s largest economy into recession.

The central bank’s board, led by its President Roberto Campos Neto, on Wednesday lowered the Selic to 3.75%, as forecast by 18 of 36 economists in a Bloomberg survey. Twelve estimated a quarter-point reduction, three foresaw a 75-basis point drop and three expected borrowing costs to remain on hold.

The bank signaled that, after six straight cuts, it “deems appropriate to keep the Selic rate at its new level,” according to a statement accompanying the unanimous decision. “However, the committee recognizes that the variance of its balance of risks has increased and that further economic data will be essential to determine its next steps.”

Brazil now joins a wave of nations from the U.S. to Turkey that are pumping monetary stimulus to counter the pandemic’s economic impact. The decision comes amid rapid deterioration in the country’s growth outlook: JPMorgan and Goldman Sachs now forecast gross domestic product to shrink about 1% in 2020 after a deep recession in the first half of the year. Meanwhile, economists continue to see inflation below target through 2021.

“This was a hawkish cut, with the central bank signaling its intention of being one and done,” said Roberto Secemski, Brazil economist at Barclays. “Still, they didn’t close the door to further easing when they acknowledged the balance of risks.”

Negative Rates

In February, Brazilian policy makers had signaled plans to pause their record-breaking easing cycle to observe its effects on the economy, which was then estimated to expand more than 2%. Earlier this month, they opened the door to more stimulus by saying the virus outbreak posed a bigger threat to growth than inflation.

The decision puts Brazil on the verge of negative real interest rates, or borrowing costs minus inflation. Consumer prices rose 4.01% on an annual basis in February but analysts surveyed by the central bank expect them rise 3.1% this year, which is nearly a full percentage point below the target.

At the same time, the monetary authority isn’t completely in the clear to continue easing, as Brazil’s real has plunged 21% this year to a record low. A weaker currency can drive inflation up by making imports more expensive.

What Our Economist Says

“The BCB did not divulge its growth forecasts, but from the tone of the statement, we fear they may be seriously underestimating the risks that Brazil enters a recession. The question is whether – when faced with a sour reality – the BCB will retreat and cut the policy rate further. We are inclined to believe they will favor other instruments, like reserve requirements and other liquidity measures, over another rate cut.”

--Adriana Dupita, Latin America economist, Bloomberg Economics

In the statement, the bank board wrote that it will use its “arsenal of monetary, exchange rate and financial stability policies to fight the currency crisis.” Still, it didn’t announce a systematic plan to support the currency as some economists expected.

(Updates with economist quote in 5th paragraph, details on currency)

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