SAO PAULO/BRASILIA (Reuters) - Brazil’s central bank dropped its benchmark interest rate to a record-low 6.00% on Wednesday, as the monetary policy committee known as Copom opted for a sharper rate cut than most economists had forecast.
“The statement suggests that the main reason behind the more aggressive move was the improvement in the global scenario, which is now characterized as ‘benign’ (instead of ‘less adverse’). We now think that the Copom will continue reducing the Selic rate until reaching the record lowest level of 5.0% at year end.
“The market will likely price more aggressive easing for both the next meeting and the whole cycle. This should lead to moderate steepening in the curve. We stay overweight duration in the EM model bond portfolio. The Copom decision will not give the real a lift, after a less dovish expected FOMC meeting.”
ALBERTO RAMOS, HEAD OF LATIN AMERICAN RESEARCH, GOLDMAN SACHS
“In a crafty way, Copom hinted at additional rate cuts but without tying up its hands or signaling a hard pre-commitment to deliver more cuts. Barring major changes in the outlook for growth, inflation, and external backdrop, the Copom sees room for additional easing, but if circumstances change (domestic and/or external) the Copom reserves the right to change its mind and deviate the forward guidance offered at this meeting.
“The Copom note of caution with regards to its own guidance and next policy moves is a hawkish remark intended to ... prevent the market from pricing a much deeper easing cycle than what is currently anticipated (around 100bp total).”
“Let the rate cuts begin. We continue to look for two more Selic cuts of 50bp for September and October, taking it to 5.00% for end-2019. We expect no change in monetary policy 2020. Today an eventual flight plan could mean less than 150bp of total adjustment.
“Yet we believe that further progress in the agenda of reforms (e.g. tax reform, central bank independence maybe) and some room for a slight additional GDP disappointment (we look for +0.5% for 2019, vs. central bank and consensus at 0.8%) will increase the space for the central bank to stimulate a bit further.”
“I did not expect that. Copom followed the market and tried to align itself with the (rates) curve. Another 50-basis-point cut is coming if pension reform goes ahead. The central bank was behind the curve and followed the market. Everyone likes a trader at the central bank, and (Economy Minister) Paulo Guedes likes it because borrowing costs fall.”
“The central bank usually begins a rate-cut cycle more smoothly, with a 25-basis-point cut. The decision to start with a 50-basis-point cut, with monetary policy already expansionary and interest rates historically low, 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 (in the first vote in the lower house of Brazil’s Congress) and the Fed rate cut ... and so it decided to act more boldly.
“With this start of a 50-basis-point cut, reflecting the central bank’s confidence — or at least a window of opportunity — the market will naturally start to bet on more big moves. For now, we maintain our forecast that the Selic rate will end this cycle at 5.00%.”
“The decision was surprising less due to the (magnitude) and more because, in the event of a 50-basis-point reduction, the central bank could have adopted a more restrained tone — and that’s not what happened. The outlook could allow a reduction of more than 100 basis points in total.
“Basically, Copom left the door open to a cut at the next meeting (in September). It didn’t commit itself, but it underscored that you generally need some degree of additional monetary stimulus.”
“The statement suggests a continuation of cuts of this magnitude. The central bank has been left to do the work of the Economy Ministry and try to stimulate the economy in the short term.
“It is worth noting that if interest rates in the United States do not fall further and interest rates here head lower, the spread between rates will make the real against the U.S. dollar less attractive. This will cause some nervousness in the currency market in the coming days.”
Reporting by Jose de Castro and Jamie McGeever; Editing by Brad Haynes and Jonathan Oatis