September 18, 2019 / 10:48 PM / 3 months ago

Brazil cuts rates to record low, sees room for more

BRASILIA (Reuters) - Brazil’s central bank cut its benchmark interest rate to a new record low of 5.50% on Wednesday as expected and suggested more rate cuts are in the pipeline, highlighting an increasingly uncertain global outlook and tame domestic inflation.

The decision by the bank’s nine-person rate-setting committee known as Copom was unanimous, and the cut was the second half-percentage-point reduction under the presidency of former trader Roberto Campos Neto following a first move in July.

In their accompanying statement, policymakers maintained the language they have used in recent months to signal an additional rate cut, specifically that the “benign” outlook for inflation should permit “additional adjustment of the degree of stimulus.”

Carlos Kawall, chief economist at Banco Safra in Sao Paulo, said he was lowering his Selic forecast to 4.50% next year from 5.00% on the back of what he said was a more dovish statement than in July.

“There is a bias to more easing, and the likelihood of another 50 basis points at the October meeting has increased,” Kawall said. “The possibility of going below 5.00% is now the more likely scenario.”

Copom outlined a “hybrid” outlook for 2020 inflation using the current exchange rate around 4.05 reais per dollar and the market consensus forecast for the Selic rate next year of 5.00%.

Even modeling with a weak currency and lower interest rate, Copom still estimated that inflation next year will be only 3.80%, below the central bank’s official target of 4.00%.

Annual consumer price inflation is currently running at 3.43%, well below the central bank’s official year-end target of 4.25%. Weak economic growth, high unemployment and substantial slack in the economy suggest inflation will remain below target this year and next, analysts say, requiring more easing.

Copom reiterated that the government must press on with economic reforms to help keep inflation expectations anchored. But it removed a reference in recent statements that the upside threat to inflation if these reforms stalled was the “dominant” risk.

The central banks of almost every major developed and emerging market economy, from the Federal Reserve and European Central Bank to Brazil’s Copom and the South African Reserve Bank, are easing policy to boost flagging growth.

Reporting by Jamie McGeever; Editing by Brad Haynes and Cynthia Osterman

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