Brazil cuts rate 100 bps but expects smaller cut in July

     Brazil’s central bank lowered its benchmark Selic rate by another 100 basis points to 10.25 percent but said a more moderate rate cut relative to today’s cut was likely appropriate at its next policy decision in late July.
     The Central Bank of Brazil has now cut its rate by 400 basis points since embarking on an easing cycle in October 2016 and by 350 basis points this year alone.
     Today’s rate cut was widely expected as economists doubted that Brazil’s second presidential crises in a year would sway the central bank from continuing to lower rates in synch with falling inflation and inflation expectations.
     While the central bank’s monetary policy committee, Copom, said the size of another rate cut on July 26 – when the next meeting is scheduled – is likely be less than today’s cut, it added “the pace of monetary easing will continue to depend on the evolution of economic activity, the balance of risks, possible reassessments of the extension of the cycle, and on inflation forecasts and expectations.”
     In October and November last year the central bank cut the rate by 25 basis points each time and then accelerated the pace of easing to 75 points in both January and February this year. This was followed by cuts of 100 points in April and today.
     While Copom said inflation developments remained favorable with “widespread” disinflation, it underscored heightened uncertainty surrounding its inflation forecasts with the speed of economic reforms and changes to the Brazilian economy as the main risks factor.
      While Brazil’s economy is improving after two years of deep recession, the central bank cautioned that sustained uncertainty over economic reforms “can have detrimental effects on economic activity.”
     As in April, Copom was unanimous in its policy decision and said it is still assuming that the Selic rate will end at 8.50 percent by the end of this year and then remain at that level until end-2018.
     Copom’s inflation projection for this year were once again lowered to 4.0 percent from 4.1 percent in forecast in April but then raised to 4.6 percent from 4.5 percent.
      Brazil’s inflation rate in April eased to 4.08 percent from 4.57 percent in March, within the central bank’s inflation target of 4.5 percent, plus/minus 1.5 percentage points.
      After falling in 2014 and 2015, Brazil’s real has firmed since early 2016 though it was hit by news of a corruption scandal that may topple President Michel Temer who became acting president in May last year after Dilma Rousseff was suspended from her duties while facing impeachment trial.
      The real was trading at 3.22 to the U.S. dollar today, up 1.2 percent this year.

      The Central Bank of Brazil issued the following statement:

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