Brazil’s central bank cut its key interest rate by 25 basis points to a record low as it signalled the end of the most aggressive easing cycle in the last decade amid risks that reforms could falter and push up prices.
All but two of the 40 analysts surveyed by Bloomberg expected the central bank to lower the Selic to 6.75%, a 750-basis point cut since October 2016. In the statement accompanying the decision, the bank indicated this cut would mark the end of the easing cycle, pending the development of economic activity and inflation, among other factors.
“Regarding the next meeting, provided the Committee’s baseline scenario evolves as expected, at this time the Copom views the interruption of the monetary easing process as more appropriate,” policymakers wrote in their unanimous decision.
Despite economic recovery, inflation forecasts remain on target for this year and next. The central bank reiterated its concern that frustrated reform expectations could increase risk premiums and consumer prices. Amid ebbing support for the government’s legislative agenda and market turmoil over recent days, central bank president Ilan Goldfajn met with lower house Speaker Rodrigo Maia, an unusual move during the bank’s two days of deliberations over the Selic.
“The central bank left a small door open. I think it’ll need pension reform to be approved,” Luiz Eduardo Portella, a partner at Modal Asset Management, a fund manager.
Despite intensive lobbying efforts, President Michel Temer is still short the votes needed to approve his proposed pension overhaul, a presidential aide told Bloomberg last week. A barrage of last-minute meetings and tweaks to the bill are unlikely to win support, according to Arthur Maia, the deputy in charge of shepherding the bill through the lower house.
Meanwhile, rising prices for items ranging from transportation to food have prompted annual inflation to quicken after last year’s sharp slowdown. Goldfajn last month reiterated that inflation trends are favourable, and that consumer prices will gradually rise to this year’s 4.5% target from 2.95% in December.
In a tweet after the decision, Temer said it was the government that created the conditions for the central bank to cut interest rates. Lower borrowing costs would lead to greater investment and job growth, he wrote.
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