Brazil Holds Interest Rate at 6.50% as Expected

The Central Bank of Brazil voted unanimously to hold its key Selic rate at 6.50 percent on 12 December 2018 as widely expected, keeping borrowing costs at the lowest level in modern history amid target inflation and lackluster GDP growth. It was the second monetary policy meeting after the presidential election.

Policymakers underscored that the global outlook remains challenging for emerging economies, saying main risks are associated with an increase in risk aversion in global financial markets, with normalization of interest rates in some advanced economies, and with uncertainty regarding international trade policy. The central added the current economic scenario warrants loose monetary policy, with rates below neutral.

The central bank started its easing cycle in October of 2016 after the inflation rate eased from double digits. Annual inflation rate in Brazil eased to 4.05 percent in November of 2018 from 4.56 percent in October and below market expectations of 4.19 percent. It is the lowest inflation rate in six months, due to slowing prices for electricity and fuels to fall moderately below the midpoint of the central bank's target range of 4.5 percent +/- 1.5 percent.

The economic recovery is still taking longer than initially expected, albeit a recent uptick. Brazil’s GDP expanded 0.8 percent on quarter in the third quarter of 2018, above a 0.2 percent rise in the previous period and in line with market expectations. It was the highest growth rate since the first quarter of 2017, mainly due to a rebound in investment and government spending after a nationwide truck strike during May and June caused supply disruptions and weighed down on growth. Through the first nine month of 2018, the Brazilian economy expanded 1.1 percent. 

The median estimate in the last central bank poll of economists (07 December 2018) currently points to growth of 1.30 percent for 2018 (vs 1.36 percent four weeks ago) and of 2.53 percent for 2019 (vs 2.50 percent four week ago). Analysts expect the Selic rate to end 2018 at 6.50 percent (unchanged), rise to 7.5 percent in 2019 (vs 8.00 percent four weeks ago) and to 8 percent in 2020. Inflation is seen at 3.7 percent in 2018, 3.9 percent in 2019, and 3.6 percent in 2020. 

Brazil Holds Interest Rate at 6.50% as Expected

Mario |
12/13/2018 11:44:27 AM