(Before It's News)
Brazil's central bank lowered its benchmark Selic rate by another 75 basis points to 12.25 percent and reiterated its guidance that further rate cuts and possible changes to the pace of easing will continue to depend on the forecast and expectations for inflation.
The Central Bank of Brazil has now cut its rate by 200 basis points since embarking on an easing cycle in October last year and by 150 points this year alone following January's larger-than-expected 75-point rate cut due to decelerating inflation and a slowing economy.
The central bank's monetary policy committee, known as Copom, was unanimous in its decision, which was without bias, and said it expected inflation to ease to around 4.2 percent this year and around 4.5 percent for 2017 based on cutting the key rate to 9.5 percent by the end of this year and 9.0 percent by the end of 2018.
Fresh economic data also show signals that are consistent with a stabilization of the economy and a gradual recovery of activity during this year while inflation is expected to continue to decelerate as inflation expectations for this year fell to around 4.4 percent.
Brazil's inflation rate fell further to 5.35 percent in January from 6.29 percent in December, well within the central bank's 2.5-6.5 percent tolerance range, and sharply lower than 2015's inflation rate of 10.67 percent and below 2014's 6.41 percent.
For 2017 and 2018 the tolerance range has been narrowed to 1.5 percentage points but around the same midpoint of 4.50 percent. In June the government is expected to reduce the midpoint target slightly with most economists looking at a new target for 2019 of 4.25 percent.
However, that would still remain above most other countries, including those in South America, where Chile and Colombia target 3 percent, like most emerging market economies, whereas Peru targets 2 percent, a level that is typically found in developed economies.
Brazil's economy shrank by an annual rate of 2.9 percent in the third quarter of last year, down from a 3.6 percent drop in the second quarter.
The Central Bank of Brazil issued the following statement:
“The Copom unanimously decided to reduce the Selic rate to 12.25 percent per year, without bias.
The following observations provide an update of the Copom's baseline scenario:
The set of indicators of economic activity released since the last Copom meeting shows some mixed signals, which are, however, consistent with stabilization of the economy in the short run. Available evidence suggests a gradual recovery of economic activity during the course of 2017;
The global outlook remains quite uncertain. Nevertheless, stronger global economic activity and its positive impact on commodity prices have so far mitigated the effects on the Brazilian economy of revisions of economic policy in some large economies;
Inflation developments remain favorable. The disinflation process is more widespread, and includes IPCA components that are most sensitive to the business cycle and monetary policy. Food price disinflation resumed, which constitutes a favorable supply shock;
Inflation expectations for 2017 collected by the Focus survey fell to around 4.4%. Expectations for 2018 and longer horizons remained around 4.5%; and
The Copom's inflation forecasts in the market scenario retreated to around 4.2% for 2017, and remained around 4.5% for 2018. This scenario assumes a path for the policy interest rate that ends 2017 and 2018 at 9.5% and 9%, respectively.
The Committee emphasizes that its baseline scenario involves risks in both directions: (i) the highly uncertain global outlook might make disinflation more difficult; (ii) the favorable food-price shock might produce second-round effects and, thus, contribute to additional reductions of inflation expectations and inflation in other economic sectors; and (iii) the recovery of economic activity might be more (or less) gradual and delayed than currently anticipated.
The Committee highlights the importance of approval and implementation of the necessary reforms – notably those of fiscal nature – and of adjustments in the Brazilian economy for the sustainability of disinflation and for the reduction of its structural interest rate.
Taking into account the baseline scenario, the current balance of risks, and a wide array of available information, the Copom unanimously decided to reduce the Selic rate to 12.25 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 the ongoing monetary easing process.
The Copom judges that the extension of the monetary easing cycle will depend on estimates of the structural interest rate of the Brazilian economy, which the Committee will continue to reassess over time.
The Copom emphasizes that a possible acceleration of the pace of monetary easing will depend not only on the estimated extension of the cycle, but also on the evolution of economic activity, on the other risk factors, and on inflation forecasts and expectations.
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.”