On Wednesday (Dec.6) Brazil’s monetary policy committee (Copom) cut the benchmark Selic interest rate by 50 basis points to 7.00 percent, an all-time low. The committee hinted that a smaller reduction may occur early in 2018, but that it would to be a very cautious movement.
Read the full Copom’s policy statement:
211th Meeting of the Monetary Policy Committee (“Copom”) of the Central Bank of Brazil Press Release* 12/06/2017 18:20
Copom unanimously decided to reduce the Selic rate by 0.5 percentage point, to 7.0 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 is consistent with a gradual recovery of the Brazilian economy;
The global outlook has been favorable, as global economic activity remains on a gradual recovery path, without exerting excessive pressure on financial conditions in advanced economies. This supports risk appetite towards emerging economies;
The Committee judges that its baseline inflation scenario has evolved, to a large extent, as expected. Inflation developments remain favorable, with various measures of underlying inflation running at comfortable or low levels. This includes the components that are most sensitive to the business cycle and monetary policy;
Inflation expectations for 2017 collected by the Focus survey retreated to around 3.0%. Expectations for 2018, 2019, and 2020 remain around 4.0%, 4.25%, and 4.0%, respectively; and
The Copom’s inflation projections in the scenario with interest rate and exchange rate paths extracted from the Focus survey stand around 2.9% for 2017, 4.2% for 2018, and 4.2% for 2019. This scenario assumes a path for the policy interest rate that ends 2017 and 2018 at 7.0%, and 2019 at 8.0%.
The Committee emphasizes that its baseline scenario involves risks in both directions. On the one hand, the combination of (i) possible second-round effects of the favorable food price shock and of low current levels of industrial goods inflation, and (ii) the possible propagation through inertial mechanisms of low inflation levels may lead to a lower-than-expected prospective inflation trajectory. On the other hand, (iii) frustration of expectations regarding the continuation of reforms and necessary adjustments in the Brazilian economy may affect risk premia and increase the path for inflation over the relevant horizon for the conduct of monetary policy. This risk intensifies in the case of (iv) a reversal of the current benign global outlook for emerging economies.
Taking into account the baseline scenario, the balance of risks, and the wide array of available information, the Copom unanimously decided to reduce the Selic rate by 0.5 percentage point, to 7.0 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 2018 and 2019, is compatible with the monetary easing process.
The Committee judges that economic conditions prescribe accommodative monetary policy, i.e., interest rates below the structural level.
The Copom emphasizes that the evolution of reforms and necessary adjustments in the Brazilian economy contributes to the reduction of its structural interest rate. The Committee will continue to reassess estimates of this rate over time.
The evolution of the baseline scenario, in line with expectations, and the stage of the monetary easing cycle made it appropriate to reduce the Selic rate by 0.5 percentage point at this Copom meeting. Regarding the next meeting, provided the Committee’s baseline scenario evolves as expected, and taking into account the stage of the monetary easing cycle, at this time the Copom views an additional moderate reduction of the pace of easing as appropriate. The Committee views this guidance as more susceptible to changes in its baseline scenario and balance of risks than in previous meetings. Going forward, the Committee judges that the current stage of the cycle recommends caution in conducting monetary policy. The Copom emphasizes that the monetary easing process 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.
The following members of the Committee voted for this decision: Ilan Goldfajn (Governor), Carlos Viana de Carvalho, Isaac Sidney Menezes Ferreira, Maurício Costa de Moura, Otávio Ribeiro Damaso, Paulo Sérgio Neves de Souza, Reinaldo Le Grazie, Sidnei Corrêa Marques e Tiago Couto Berriel.
* This press release represents the Copom’s best effort to provide an English version of its policy statement. In case of any inconsistency, the original version in Portuguese prevails.