May 6, 2020 / 9:37 PM / 19 days ago

Brazil surprises with bigger rate cut, signals another

BRASILIA (Reuters) - Brazil’s central bank slashed interest rates more than expected on Wednesday, cutting its benchmark Selic rate by 75 basis points to a record-low 3.00% and previewing another cut as it battles an economic crisis fueled by the coronavirus pandemic.

It was Brazil’s biggest rate cut since October 2017 and, recognizing that the downturn will be greater than previously thought, policymakers signaled they are ready to cut rates by up to 75 basis points at their next meeting in June.

The bank’s nine-person rate-setting committee, known as Copom, said its decision was unanimous, although two policymakers suggested an even larger cut. A Reuters survey of 26 economists at the end of April had forecast a second straight rate cut of 50 basis points at Wednesday’s meeting.

“We are seeing that the economy is going through a very profound crisis, and the right policy combination is a very low interest rate and a very low exchange rate,” said Carlos Kawall, director at Asa Bank and a former Treasury Secretary.

“Considering where things are going with growth and inflation, I think we will have a back-to-back 75 basis point cut at the next meeting,” he added.

Many economists predict Brazil will register its worst annual downturn in at least a half century. Earlier on Wednesday, Societe Generale said it now expects the economy to shrink by 7.4% this year.

Copom said conditions called for “unusually large monetary stimulus” and were unusually explicit about plans for more, although a cut at its June meeting would likely be the last in the cycle, it said.

“For the next meeting, conditional on the fiscal scenario and on the economic data, the Committee considers a final monetary adjustment, not larger than this one,” policymakers wrote in a statement accompanying their decision.

The gravity of the economic scenario and distinct lack of inflationary pressures prompted two committee members to suggest front-loading stimulus with an even bigger cut and then keeping the benchmark Selic rate on hold for a period of months.

Although the real is close to breaking past April’s record-low 5.75 per dollar, inflationary pressures remain muted. Copom’s inflation forecasts, using various combinations of exchange and interest rate scenarios, are well below the bank’s 2020 and 2021 inflation targets of 4.0% and 3.75%, respectively.

Policymakers warned that risk premia and structural interest rates could rise if there is perception that Brazil’s emergency public spending to fight the crisis becomes permanent or the government’s economic reform agenda is put on ice for long.

“A decline in fiscal uncertainty ... will be essential to determine (Copom’s) next steps,” wrote policymakers.

Reporting by Jamie McGeever; Editing by Brad Haynes and Diane Craft

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