Brazil Holds Interest Rate at 6.50%

The Central Bank of Brazil voted unanimously to hold its key Selic rate at 6.50 percent on August 1st as widely expected, keeping borrowing costs at the lowest level in modern history amid below-target inflation and mixed economic data.

Policymakers underscored the effects of the halt in the transportation sector in May, negatively weighing on both the economic and inflation outlooks. Regarding the next meetings, the Committee emphasized that risks around its baseline scenario remain in both directions and reiterated that economic conditions prescribe accommodative monetary policy.

The central bank started its easing cycle in October of 2016 after the inflation rate eased from double digits. Annual inflation climbed to 4.39 percent in June 2018 from 2.86 percent in the previous month. The rate came in slightly below market expectations of 4.42 percent, still hitting the highest level since March 2017 on the back of persistent currency weakness.

The economic recovery is still taking longer than initially expected, with recent data affected by strikes. Brazil's economic activity shrank 3.34 percent month-over-month in May 2018, a month highly affected by nationwide truckers strikes, following a 0.46 percent growth in April and compared to market expectations of a 3.45 percent contraction. It was the steepest decline in economic activity since the series began in 2003. Meanwhile, Industrial production dipped 6.6 percent year-on-year in May 2018, the most since October 2016, compared to an upwardly revised 9.0 percent jump in April and market consensus of a 11.5 percent slump.

The median estimate in the last central bank poll of economists (27 July 2018) currently points to growth of 1.50 percent for 2018 (vs 1.55 percent four weeks ago) and of 2.50 percent for 2019 (unchanged). Analysts expect the Selic rate to end 2018 at 6.50 percent (unchanged).

Brazil Holds Interest Rate at 6.50%

Mario |
8/2/2018 9:30:03 AM