Stockholm (Ekonamik) – On the same day as the Fed cut rates for the first time since the financial crisis, the Brazilian central bank (BCB) followed suit by cutting the country’s policy SELIC rate by 50bps to 6% at its July meeting. This was the first rate cut by the BCB since April 2018.
According to the BCB’s statement, “recent data on economic activity suggest a possible resumption of the process of economic recovery. Copom’s baseline scenario assumes that this recovery will occur at a gradual pace. The global outlook has become benign, owing to changes in monetary policy in major economies. Nevertheless, the risks associated with a slowdown in global growth remain. The Committee judges that various measures of underlying inflation are running at comfortable levels. This includes the components that are most sensitive to the business cycle and monetary policy; Inflation expectations for 2019, 2020, 2021 and 2022 collected by the Focus survey are around 3.8%, 3.9%, 3.75%, and 3.50%, respectively.”
The move was anticipated by Mario Mesquita, the Chief Economist of Brazilian banking giant Itau. “We expect the Copom to restart the easing cycle in July with a 50-bp cut, greater than we initially forecasted (25-bp), due to favourable external winds and lower risks in the domestic scenario that result from progress in the pension reform,” he explained in a macro scenario note at the start of the month. “This cut is likely to be followed by two additional 50-bp cuts, which would take the Selic rate to 5.00% before year-end. We expect the Selic to remain at this level throughout 2020.”
“More easing is likely to come given the positive direction of travel in pension and other reform agendas. It has become easier and easier for the central bank to justify a dovish stance,” according to Craig Botham, Senior Emerging Markets Economist at Schroders. “The ultimate catalyst for a more dovish approach has been the developments in the seat of power, Brasilia. The forward momentum of pension reform points to successful passage by October, removing a major source of uncertainty for Brazilian assets.”
The Brazilian real devalued on the back of the decision, closing the day at BRL3.81 to the US$1, up from BRL3.79 at the start of Wednesdays’ trading session.
Picture from Pixabay
