July 31, 2019 / 9:56 PM / 4 months ago

Brazil central bank cuts rate to new low, sees room for more

BRASILIA (Reuters) - Brazil’s central bank cut its benchmark interest rate to a new low of 6.00% on Wednesday, an aggressive first move in a widely anticipated easing cycle to inject life into a moribund economy and prevent inflation from slipping too far below target.

FILE PHOTO: The central bank headquarters building is seen in Brasilia, Brazil May 16, 2017. REUTERS/Ueslei Marcelino/File Photo

The reduction from 6.50% was the central bank’s first rate cut since March 2018, following significant progress on domestic fiscal reforms and looser monetary policy abroad, including the U.S. Federal Reserve’s rate cut earlier in the day.

The bank’s nine-member monetary policy committee, known as Copom, voted unanimously to lower the Selic rate by 50 basis points, a move predicted by 10 out of 27 economists in a Reuters poll. Fourteen predicted a milder 25-basis-point cut.

In a statement accompanying its decision, Copom noted that inflation has evolved “favorably” and that the growth remains weak. Indeed, it said a resumption of a gradual recovery is “possible,” underscoring uncertainty about an economy flirting with a technical recession this year.

If the inflation outlook remains benign, additional monetary policy stimulus should be possible, Copom added, emphasizing that further steps will still depend on how economic activity and the inflation outlook evolves.

“The decision to start with a 50-basis-point cut ... shows that the central bank is confident in its strategy. It sees an important shift in the balance of risks after the approval of pension reform and the Fed rate cut,” said Zeina Latif, chief economist at XP Investimentos.

“The market will naturally start to bet on more big moves,” she said, predicting a further 100 basis points of easing over the cycle to leave the Selic rate at 5.00%.

Analysts had said in the run-up to Wednesday’s decision that recent progress on fiscal reforms, which should boost investor sentiment and bring down long-term inflationary pressures, would also give the central bank cover to cut interest rates.

Central bank President Roberto Campos Neto had previously sought to play down a direct link between a major social security overhaul and a rate cut. Copom’s statement on Wednesday echoed its previous one in June that uncertainty over the reform was the biggest single obstacle to lower rates.

The government’s proposal to trim pension benefits in order to bring the public deficit under control passed by a resounding margin in the lower house of Congress earlier in July, but still needs another vote there, followed by approval in the Senate.

Still, the economic and inflation outlook at home and a more benign global outlook helped shift the balance, prompting the central bank to catch up with market pricing.

“I did not expect that. The central bank was behind the curve and followed the market. Another 50-basis-point cut is coming if pension reform is fully approved,” said Jose Francisco Goncalves, chief economist at Banco Fator.

Reporting by Jamie McGeever; Editing by Brad Haynes, Grant McCool and Jonathan Oatis

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