Brazil Cuts Key Interest Rate To 3-1/2-Year Low Of 10.25%


The Central Bank of Brazil unanimously cut its key Selic rate by 100 basis points to 10.25 percent on May 31st of 2017, as widely anticipated. It is the sixth straight rate decline, bringing borrowing costs to the lowest since December of 2013 amid slowing inflation and a sticky contraction. It follows a 100 bps cut in the April 12th of 2017 meeting.

The statement underscored that inflation developments remain favorable; that inflation expectations for 2017 fell to around 4.0 percent; and that the Copom views the heightened uncertainty regarding the speed of the process of reforms and adjustments in the Brazilian economy as the main risk factor. The Committee also mentioned that a softer pace of monetary easing relative to the 100 bps cut of the May 31st meeting is likely to be appropriate at its next 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. Consumer prices in Brazil increased 4.08 percent year-on-year in April of 2017, following a 4.57 percent rise in March and in line with market expectations of 4.1 percent. The inflation rate slowed for the eighth straight month to the lowest since July of 2007, standing below the central bank target of 4.5 percent for the first time since December of 2009.

Still, the economic recovery could take even longer than initially expected: Brazil’s industrial production expanded only 1.1 percent year-on-year in February, compared to expectations of a 2.1 percent rise. Consumer confidence declined to 100.6 in May of 2017 from 103.4 in the previous month. Political uncertainty coming from President Temer’s involvement in Lava Jato could explain the decline. On the positive side, the manufacturing PMI increased to 50.1 in April of 2017 from 49.6 in March, beating market expectations of 49.8. The reading pointed to the first expansion in factory activity since January of 2015. The median estimate in a central bank poll of economists currently points to growth of 0.49 percent in 2017 and 2.48 percent in 2018. Analysts expect the Selic rate to end 2017 at 8.50 percent (unchanged compared to 4 weeks ago).

Mario | mario@tradingeconomics.com
5/31/2017 9:09:23 PM