Stockholm (Ekonamik) – At its May 8th Monetary policy meeting, the Central Bank of Brazil (BCB) unanimously decided to hold policy Selic rates constant at 6.5%, according to a press release by the central bank. The rate was last lowered to this level in March of 2018 from 6.75%.
“Recent data on economic activity suggest that the softening observed at the end of 2018 continued in early 2019,” explains the central bank. “The Copom’s* baseline scenario assumes that the process of gradual economic recovery will resume. The global outlook remains challenging. On the one hand, the risks associated with normalization of interest rates in some advanced economies in the short and medium runs are low. On the other hand, the risks associated with a slowdown in global growth remain
According to the press release, the central bank expects inflation of 4.1% for 2019 and 3.8% for 2020. “This scenario assumes a path for the Selic rate that ends 2019 at 6.5% p.a. and increases to 7.5% p.a. over the course of 2020. It also assumes a path for the exchange rate that ends 2019 at R$/US$ 3.75, and 2020 at R$/US$ 3.80. In the scenario with a constant interest rate, at 6.5% p.a., and a constant exchange rate, at R$/US$ 3.95*, the projections for 2019 and 2020 stand around 4.3% and 4.0%, respectively.”
“Changes in the policy statement suggested that the authorities are (rightly in our view) less sanguine on the state of the recovery,” according to Itau, Brazil’s largest bank and the country’s biggest private company. “While still stressing the need to wait for more clarity on the reform front, the committee seems to be inclined to reassess the adequacy of the stimulus its current stance injects in the economy, in case activity fails to strengthen in the coming months.”
Brazil went through an economic crisis between 2014 and 2016. Following the global financial crisis of 2007-08, growth had been driven by low policy rates, generous lending from state-owned development banks, occasional price controls, government budget deficits and high commodity prices. However, as commodity prices fell in 2014 for both soy and crude oil, the value of exports fell. The end of electricity price controls added to an already upwards-trending inflation caused by the credit-fuelled demand stimulus. Inevitably, the central bank increased its policy interest rate from 10% to 14.5% over 2014 and 2015, which accelerated the end of the growth cycle bringing the entire economy came crashing down. Unemployment rose from 6.2% in December 2014 to 13.7% in March 2017 and the economy contracted for two consecutive years.
“April’s IPCA inflation came in at 0.57%, below our forecast (0.63%) and the market’s (0.62%),” according to Itau. “In year-over-year terms, inflation advanced to 4.94% (above our estimate and the market’s, both at 5.0%), from 4.58% in the previous month. Compared to our forecast, the negative surprise was driven mainly by market set prices (6 bps lower than our call), especially due to the food at home component (-7 bps).”
Picture courtesy of Banco do Brasil (BCB Headquarters building in Brasilia)
*The “Copom” is the Comitê de Política Monetária, BCB’s monetary policy committee