Brazil cuts rate 100 bps but expects smaller cut in July

     Brazil's central bank lowered its benchmark Selic rate by another 100 basis points to 10.25 percent but said a more moderate rate cut relative to today's cut was likely appropriate at its next policy decision in late July.
     The Central Bank of Brazil has now cut its rate by 400 basis points since embarking on an easing cycle in October 2016 and by 350 basis points this year alone.
     Today's rate cut was widely expected as economists doubted that Brazil's second presidential crises in a year would sway the central bank from continuing to lower rates in synch with falling inflation and inflation expectations.
     While the central bank's monetary policy committee, Copom, said the size of another rate cut on July 26 - when the next meeting is scheduled - is likely be less than today's cut, it added "the pace of monetary easing will continue to depend on the evolution of economic activity, the balance of risks, possible reassessments of the extension of the cycle, and on inflation forecasts and expectations."
     In October and November last year the central bank cut the rate by 25 basis points each time and then accelerated the pace of easing to 75 points in both January and February this year. This was followed by cuts of 100 points in April and today.
     While Copom said inflation developments remained favorable with "widespread" disinflation, it underscored heightened uncertainty surrounding its inflation forecasts with the speed of economic reforms and changes to the Brazilian economy as the main risks factor.
      While Brazil's economy is improving after two years of deep recession, the central bank cautioned that sustained uncertainty over economic reforms "can have detrimental effects on economic activity."
     As in April, Copom was unanimous in its policy decision and said it is still assuming that the Selic rate will end at 8.50 percent by the end of this year and then remain at that level until end-2018.
     Copom's inflation projection for this year were once again lowered to 4.0 percent from 4.1 percent in forecast in April but then raised to 4.6 percent from 4.5 percent.
      Brazil's inflation rate in April eased to 4.08 percent from 4.57 percent in March, within the central bank's inflation target of 4.5 percent, plus/minus 1.5 percentage points.
      After falling in 2014 and 2015, Brazil's real has firmed since early 2016 though it was hit by news of a corruption scandal that may topple President Michel Temer who became acting president in May last year after Dilma Rousseff was suspended from her duties while facing impeachment trial.
      The real was trading at 3.22 to the U.S. dollar today, up 1.2 percent this year.


      The Central Bank of Brazil issued the following statement:

"The Copom unanimously decided to reduce the Selic rate by one percentage point, to 10.25 percent per year, without bias.

The following observations provide an update of the Copom’s baseline scenario:

The set of indicators of economic activity released since the last Copom meeting remains consistent with stabilization of the Brazilian economy in the short run and a gradual recovery during the course of the year. If sustained over a long period, high levels of uncertainty regarding the evolution of reforms and adjustments in the economy can have detrimental effects on economic activity;

Stronger global economic activity has so far mitigated the effects on the Brazilian economy of possible changes of economic policy in central economies;

Inflation developments remain favorable. Disinflation is widespread and includes IPCA components that are most sensitive to the business cycle and monetary policy. It is necessary to monitor possible impacts of higher uncertainty on the prospective path of inflation;

Inflation expectations for 2017 collected by the Focus survey fell to around 4.0%. Expectations for 2018 are around 4.4%, and expectations for 2019 and longer horizons are around 4.25%; and

The Copom’s inflation projections for 2017 and 2018 in the scenario with interest rate and exchange rate paths extracted from the Focus survey are around 4.0% and 4.6%, respectively. This scenario assumes a path for the policy interest rate that ends 2017 at 8.5% and remains at that level until the end of 2018. The Committee emphasizes that its conditional inflation forecasts currently involve a higher level of uncertainty.

The Committee views the heightened uncertainty regarding the speed of the process of reforms and adjustments in the Brazilian economy as the main risk factor. This arises from both a higher probability of scenarios that may hinder this process, and the difficulty in assessing the effects of these scenarios on the determinants of inflation.

Taking into account the baseline scenario, the balance of risks, and the wide array of available information, the Copom unanimously decided to reduce the Selic rate by one percentage point, to 10.25 percent per year, without bias. The Committee judges that convergence of inflation to the 4.5% target over the relevant horizon for the conduct of monetary policy, which includes 2017 and, to a greater extent, 2018, is compatible with the monetary easing process.

The Copom emphasizes that the extension of the monetary easing cycle will depend, among other factors, on estimates of the structural interest rate of the Brazilian economy. The Committee judges that the recent increase in the uncertainty regarding the evolution of reforms and adjustments in the economy hampers a more timely reduction of estimates of the structural interest rate, and makes them more uncertain. The Committee will continue to reassess these estimates over time.

In light of the basic scenario and current balance of risks, the Copom judges that a moderate reduction of the pace of monetary easing relative to the pace adopted today is likely to be appropriate at its next meeting. Naturally, the pace of monetary easing will continue to depend on the evolution of economic activity, the balance of risks, possible reassessments of the extension of the cycle, and on inflation forecasts and expectations.

The following members of the Committee voted for this decision: Ilan Goldfajn (Governor), Anthero de Moraes Meirelles, Carlos Viana de Carvalho, Isaac Sidney Menezes Ferreira, Luiz Edson Feltrim, Otávio Ribeiro Damaso, Reinaldo Le Grazie, Sidnei Corrêa Marques, and Tiago Couto Berriel."

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