Brazil’s Copom lowers Selic rate to 7%, slows pace of monetary easing

By Marisa Wong

Morgantown, W.Va., Dec. 6 – Banco Central do Brasil’s Monetary Policy Committee (Copom) unanimously decided to lower the Selic rate by 50 basis points to 7% at its meeting on Wednesday, according to a press release.

The committee had lowered the Selic rate by 75 bps to 7½% at its previous meeting in October and, before that, by 100 bps to 8¼% at its meeting in September.

The set of indicators of economic activity released since the last Copom meeting is consistent with a gradual recovery of the Brazilian economy, the committee said in Wednesday’s release.

The committee also noted that the global outlook has been favorable.

The committee said it believes that its baseline inflation scenario has significantly evolved, as expected. Inflation developments remain favorable, with various measures of underlying inflation running at comfortable or low levels.

Inflation expectations for 2017 collected by the bank’s Focus survey retreated to around 3%. Expectations for 2018, 2019 and 2020 remain around 4%, 4.25% and 4%, respectively, according to the release.

Copom’s inflation projections in the scenario with interest rate and exchange rate paths extracted from the Focus survey stand around 2.9% for 2017, 4.2% for 2018 and 4.2% for 2019. This scenario assumes a path for the policy interest rate that ends 2017 and 2018 at 7% and 2019 at 8%.

The committee emphasized that its baseline scenario involves risks in both directions. On the one hand, the combination of possible second-round effects of favorable food price shock and of low levels of industrial goods inflation and the possible propagation through inertial mechanisms of low inflation levels may lead to a lower-than-expected prospective inflation trajectory.

On the other hand, the committee said, frustration of expectations about the continuation of reforms and necessary adjustments in the Brazilian economy may affect risk premia and increase the path for inflation over the horizon. This risk intensifies if the current benign global outlook for emerging economies is reversed.

Taking into account the baseline scenario and this balance of risks, Copom considered it appropriate to reduce the Selic rate by 50 bps this time.

The committee said it believes that convergence of inflation to the 4.5% target over the near term, which includes 2018 and 2019, is compatible with the monetary easing process.

The committee said economic conditions suggest accommodative monetary policy, or interest rates below the structural level.

The committee added that if its baseline scenario evolves as expected, it foresees a moderate reduction of the pace of monetary easing at its next meeting.

The bank voted unanimously to reduce the Selic rate during each of its past five meetings, as previously reported.

© 2015 Prospect News.
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