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Brazil cuts rate 25 bps, larger cuts depend on inflation

Wednesday, November 30, 2016 17:26
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(Before It's News)

    Brazil's central bank lowered its benchmark Selic rate by another 25 basis points to 13.75 percent, reiterating its guidance from last month that “the magnitude of monetary easing and a possible speeding up of its pace will depend on inflation forecasts and expectations…”
     The Central Bank of Brazil, which has now cut its rate by 50 basis points following last month's cut – the bank's first rate cut since August 2012 – added the policy decision was unanimous by the members of its Copom committee and no bias was indicated.
    In its guidance, the central bank also said the pace of disinflation may intensify if the country's economic recovery is delayed further and is more gradual than anticipated.
    “The Committee judges that convergence of inflation to the 4.5% target over the relevant horizon for the conduct of monetary policy, which includes 2017 and 2018, is compatible with a gradual easing of monetary conditions,” the central bank said.
    Brazil's inflation rate fell to 7.87 percent in October from 8.48 percent in September to the lowest rate since February 2015, with the central bank saying the drop was better than expected and partly due to lower food prices but also signs of more widespread disinflation.
    The central bank said 2016 inflation forecasts in the reference and market scenarios had dropped to around 6.6 percent from around 7 percent seen last month.
    Forecasts for 2017 show inflation around 4.4 percent and 4.7 percent, respectively, while
forecasts for 2018 for the two scenarios were around 3.6 percent and 4.6 percent, respectively.
     Brazil's economy shrank by 0.8 percent in the third quarter from the second quarter for the seventh quarter of contraction in a row. On an annual basis, Gross Domestic Product shrank by 2.9 percent compared with a decline of 3.6 percent in the second quarter.
    “The set of indicators released since the last Copom meeting suggests weaker-than-expected economic activity in the short run,” the central bank said, adding forecast for growth this year and next year had been revised downward.
      The exchange rate of Brazil's real fell from August 2014 until it hit a record low of around 4.15 to the U.S. dollar in January this year. The real then firmed to around 3.12 in late October before again weakening in the last six weeks.
    The real was trading at 3.39 to the dollar today, still almost 17 percent higher than at the start of this year.

    The Central Bank of Brazil issued the following statement:

“The Copom unanimously decided to reduce the Selic rate to 13.75 percent per year, without bias.
The following observations provide an update of the Copom's baseline scenario:
The set of indicators released since the last Copom meeting suggests weaker-than-expected economic activity in the short run. This led to downward revisions in forecasts for GDP growth in 2016 and 2017. Available evidence indicates that the economic recovery may be further delayed, and be more gradual than previously anticipated;
The global outlook is particularly uncertain. The increase in asset price volatility indicates a possible end to the benign environment for emerging economies. There is a high probability that the process of normalization of the stance of monetary policy in the United States will soon resume, and the course of its economic policy is uncertain;
Recent inflation releases were more favorable than expected, partly due to a drop in food prices, but also with signs of more widespread disinflation;
Inflation expectations for 2017 collected by the Focus survey fell to around 4.9%. Expectations for 2018 and longer horizons remained around 4.5%;
The Committee's inflation forecasts fluctuated around the previous levels due to factors with opposing effects. Forecasts for 2016 in the reference and market scenarios fell to around 6.6%. Forecasts for 2017 in the reference and market scenarios show inflation around 4.4% and 4.7%, respectively. Forecasts for 2018 inflation in the reference and market scenarios are around 3.6% and 4.6%, respectively; and
The steps toward approval of fiscal reforms have been positive so far.
The Committee identifies the following risks to the baseline scenario for inflation:
On the one hand, (i) the possible end to the benign environment for emerging economies might make disinflation more difficult; (ii) signs of pause in the process of disinflation of some IPCA components that are most sensitive to monetary policy and economic slack persist, what may point to slower convergence of inflation to target; (iii) the process of approval and implementation of the necessary reforms and adjustments in the economy is lengthy, and carries uncertainty;
On the other hand, (iv) weaker economic activity and a high level of economic slack may produce disinflation at a faster pace than the one embedded in the Copom's conditional forecasts; (v) short-run inflation behavior has been more favorable, which may signal lower inflation persistence; and (vi) the process of approval and implementation of the necessary reforms and adjustments in the economy may be faster than anticipated.
Taking into account the baseline scenario, the current balance of risks, and the wide array of available information, the Copom unanimously decided to reduce the Selic rate to 13.75 percent per year, without bias. The Committee judges that convergence of inflation to the 4.5% target over the relevant horizon for the conduct of monetary policy, which includes 2017 and 2018, is compatible with a gradual easing of monetary conditions.
The magnitude of monetary easing and a possible speeding up of its pace will depend on inflation forecasts and expectations, and on the evolution of the aforementioned risk factors. 
In that respect, the Copom emphasizes that the pace of disinflation in its forecasts might intensify if the economic recovery is delayed further, and occurs more gradually than anticipated. 
This intensification of the disinflation process relies on an adequate global environment.
The following members of the Committee voted for this decision: Ilan Goldfajn (Governor), Anthero de Moraes Meirelles, Carlos Viana de Carvalho, Isaac Sidney Menezes Ferreira, Luiz Edson Feltrim, Otávio Ribeiro Damaso, Reinaldo Le Grazie, Sidnei Corrêa Marques and Tiago Couto Berriel.”

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