Brazil Cuts Interest Rate By 100 Bps To 11.25%

The Central Bank of Brazil cut its key Selic rate by 100 basis points to 11.25 percent on April 12th 2017, in line with market expectations. It is the fifth straight rate decline, bringing borrowing costs to the lowest since November of 2014 amid slowing inflation and a sticky contraction. It follows tandem 75bps cuts in February and January.

In its policy statement, the central bank highlighted that inflation developments remain favorable. The Copom's inflation forecasts for 2017 and 2018 in the scenario with interest rate and exchange rate paths are around 4.1% and 4.5%, 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 (vs 9.5 percent and 9.0 percent in the previous meeting).

The central bank started its easing cycle in October last year after the inflation rate eased from double digits. Inflation slowed faster than expected in the past seven months due to subdued economic activity and a stronger real. The inflation fell to 4.57 percent in March, easing from a 4.76 percent rise in February. Although the inflation rate remains slightly above central bank's official target of 4.5 percent, it stands at its lowest level since August of 2010.

Still, the economic recovery could take even longer than initially expected: Brazil’s industrial production contracted 0.8 percent year-on-year in February, compared to expectations of a 0.4 percent expansion. On the positive side, the manufacturing PMI rose to a 25-month high of 49.6 in March from 46.9 in February. Moreover, the industrial production report showed manufacturing output increased for the first time in over two years. The median estimate in a central bank poll of economists currently points to growth of 0.41 percent in 2017 and 2.50 percent in 2018. Analysts expect the Selic rate to end 2017 at 8.50 percent (-50bps compared to 4 weeks ago).

Brazil Cuts Interest Rate By 100 Bps To 11.25%

Mario |
4/12/2017 9:16:59 PM