March 21, 2018 / 9:20 PM / 7 months ago

Brazil cuts rates to all-time low, signals more easing ahead

SAO PAULO/BRASILIA (Reuters) - Brazil’s central bank cut interest rates to an all-time low on Wednesday and unexpectedly signaled it is likely to pursue another reduction at its May meeting as inflation continues to underwhelm.

The bank’s nine-member monetary policy committee, known as Copom, cut the benchmark Selic rate by 25 basis points to 6.50 percent, capping a 775-basis-point decline since October 2016.

The cut had been widely expected by economists in a Reuters poll, though most had predicted that this week’s reduction would be the last in the deepest easing cycle in over 10 years. Yields on interest rate future markets indicated a similar consensus among traders. <0#2DIJ:> <BR/INT>

But policymakers were explicit in forecasting another cut, highlighting the bank’s struggles to lift inflation back to its target after undershooting it for the first time ever last year.

“Regarding the next meeting, at this time the Copom views an additional moderate monetary easing as appropriate,” the bank’s policy statement said. “The Committee judges that this additional stimulus mitigates the risk of delayed convergence of inflation toward the targets.”

That is a sharp reversal in the bank’s recent communication, after it strongly suggested at its last policy meeting that it planned to halt monetary easing.

Bank chief Ilan Goldfajn acknowledged earlier this month that policymakers themselves were surprised by the recent string of weak inflation readings, suggesting those plans had gone off the rails.

“Few had thought the bank would leave the door open for a further rate cut, but it blasted them wide open,” said André Pimentel, an economist at Mirae Asset Global Investments.

The bank is unlikely to pursue further cuts after the May meeting unless the economic outlook changes radically, the statement said.

Still, it stressed the risk that the current slow pace of inflation could extend for a longer period.

Weak food prices due to a record harvest were mostly to blame for muted inflation in 2017, the central bank has repeatedly stressed. But it held off from making that point in Wednesday’s policy statement, a sign of growing concern with underlying inflation trends.

Expectations for 2018 inflation remain below the midpoint of the official target range of 4.5 percent, plus or minus 1.5 percentage points, according to a weekly survey.

Double-digit unemployment rates and widespread idle capacity have kept a lid on price hikes as the economy recovers from its deepest recession in decades at an uneven pace.

Reporting by Bruno Federowski and Marcela Ayres; Writing by Bruno Federowski; Editing by Sandra Maler and Leslie Adler

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