(Before It's News)
Brazil's central bank cut its benchmark Selic rate by a larger-than-expected 75 basis points to 13.00 percent as “widespread disinflation and weaker-than-than expected economic activity makes it already appropriate to frontload the monetary easing cycle, and allows the new pace of easing.”
The Central Bank of Brazil, which has now cut its rate by 125 basis points since October last year when it began its easing cycle, added further rate cuts and possible changes to the pace of easing would continue to depend on inflation forecasts and expectations.
The central bank's monetary policy committee, known as Copom, said it had considered cutting the rate by 50 basis points today and then signaling a larger cut at the following meeting but decided to cut the rate by 75 points as inflation expectations were anchored, the drop in inflation was faster than expected and the economy weaker than expected.
Brazil's headline inflation rate declined to 7.87 percent in December from 8.48 percent in November for the lowest rate since April 2014 while surveys showed that inflation expectations for 2017 fell to around 4.8 percent while they steady at 4.5 percent for 2018.
The National Consumer Price Index, known as IPCA, eased to 6.3 percent end-2016, the central bank said, within its inflation tolerance range of 4.5 percent, plus/minus 2 percentage points.
The central bank added that its own forecasts were lowered to around 4.0 percent for 2017 and 3.4 percent for 2018 from the latest inflation report which forecast 4.4 percent inflation and 3.6 percent inflation.
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 2016. The real then firmed to around 3.12 in late October before again weakening until December.
Since then the real has been firming and was trading at 3.197to the dollar today, up almost 24 percent since the start of 2016.
The Central Bank of Brazil issued the following statement
“The Copom unanimously decided to reduce the Selic rate to 13.00 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. Available evidence indicates that the economic recovery should be delayed even further, and be more gradual than previously anticipated;
The global outlook remains quite uncertain. Nevertheless, the end of the benign environment for emerging economies has had a limited impact so far;
Recent inflation releases were more favorable than expected. There are signs that the more widespread disinflation process has reached IPCA components that are most sensitive to the business cycle and monetary policy;
IPCA inflation for 2016 ended at 6.3%, well below expectations held a few months ago, and within the tolerance limits set for the inflation target for last year;
Inflation expectations for 2017 collected by the Focus survey fell to around 4.8%. Expectations collected by the same survey for 2018 and longer horizons remained anchored, around 4.5%;
The Committee's conditional inflation forecasts retreated relative to those in the latest Inflation Report, which were based on information available until December 9, 2016. Among other factors, changes in forecasts were influenced by inflation and economic activity data released since then. In the reference scenario, forecasts for 2017 and 2018 are around 4.0% and 3.4%, respectively. The market scenario for 2017 and 2018 shows inflation around 4.4% and 4.5%, respectively; and
The process of consideration and approval of fiscal reforms by the Congress has been positive so far.
The Committee identifies the following risks to the baseline scenario for inflation:
On the one hand, (i) the highly uncertain global outlook might make disinflation more difficult; (ii) the process of disinflation of some IPCA components that are most sensitive to the business cycle and monetary policy requires continuous attention; (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 13.00 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, with a gradually increasing weight, 2018, is compatible with an intensification of the ongoing monetary easing process.
The Copom entertained reducing the Selic rate to 13.25 percent per year and signaling a larger cut at the next meeting. However, in face of the environment with anchored inflation expectations, the Committee judges that the current scenario with more widespread disinflation and weaker-than-expected economic activity makes it already appropriate to frontload the monetary easing cycle, and allows the new pace of easing. The extension of the cycle and possible revisions of the pace of easing will continue to depend on inflation forecasts and expectations, and on the evolution of the aforementioned risk factors.
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.”