February 5, 2020 / 9:43 PM / 22 days ago

UPDATE 3-Brazil cuts interest rates to record low, signals pause

(Adds analyst reaction)

By Jamie McGeever

BRASILIA, Feb 5 (Reuters) - Brazil’s central bank on Wednesday lowered its benchmark interest rate by 25 basis points to a record-low 4.25%, and policymakers signaled they were ready to pause monetary easing after five consecutive rate cuts.

In a statement, the bank’s rate-setting committee, known as Copom, said: “In light of the lagged effects of the monetary easing cycle that began in July 2019, the Committee deems appropriate to interrupt the monetary easing process.”

The unanimous decision was expected, with 22 out of 29 economists in a Reuters poll predicting the quarter-point cut. Seventeen of 20 respondents to a separate question said they saw a neutral skew for monetary policy over the next 12 months.

“It’s pretty clear they are done” cutting rates, said Carlos Kawall, director at Asa Bank in Sao Paulo. “It’s now a game of watching the economy evolving.

“Interest rates may remain at this level for a long time ... but if a deceleration threatens a 2% growth figure this year, they might resume cutting rates, even this year,” he said.

Copom members said the economy continues to recover gradually and that the outlook for emerging markets remains positive, despite a recent increase in uncertainty. Current monetary policy is stimulative, which is warranted, they said.

The committee said its next steps will depend on economic activity and inflation risks, particularly the outlook for 2021.

Policymakers’ outlook for inflation appeared to soften slightly from the last Copom meeting. Using a “hybrid” model with a constant exchange rate of 4.25 reais per dollar and rate forecasts from the central bank’s weekly survey of economists, Copom projected 3.5% inflation this year and 3.7% next.

In December, the inflation outlook for both this year and next was 3.7%, using a hybrid exchange rate of 4.20 reais per dollar and economists’ average rates outlook.

The central bank’s official inflation target this year is 4.00%, and 3.75% next year.

Some observers noted that the decision to signal no more easing may have been taken to stop the slide in the currency, which hit an all-time low last week around 4.28 per dollar.

“They will never say it, they don’t want to make a link between interest rates and FX, but they are concerned. They shut the door because they don’t want to lose control on the exchange rate,” said the head of trading at a bank in Sao Paulo.

“And they are correct.” ($1 = 4.24) (Reporting by Jamie McGeever in Brasilia Editing by Leslie Adler and Matthew Lewis)

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