(Bloomberg) -- Brazil’s central bank on Wednesday delivered its strongest message yet that it’s poised to pump more stimulus into an ailing economy after lowering its key rate by a half percentage point.
The bank’s board, led by its President Roberto Campos Neto, cut the benchmark Selic to a record low of 6%, as forecast by 18 of 45 economists surveyed by Bloomberg. The others expected a smaller reduction or even no cut at all. While stating that their next move will depend on activity and inflation data, policy makers signaled that forecasts for below-target consumer prices in 2020 leave the door open to more easing.
“The Committee deems that the consolidation of the benign scenario for prospective inflation should permit additional adjustment of the degree of stimulus," the bank board wrote in a statement accompanying the decision.
Brazil now joins central banks from the U.S. to South Africa to Indonesia that are lowering borrowing costs as global activity slows. Local policy makers are rushing to the aid of an economy that’s expected to grow less than 1% this year amid headwinds including high unemployment, low confidence and weak investments. The central bank’s actions also come after the lower house of Congress backed a pension reform, thus mitigating the primary threat to inflation going forward.
President Jair Bolsonaro has been saying for some time that lower interest rates would be positive for the economy and is pleased with the central bank’s decision, his spokesperson Otavio Rego Barros told reporters after the new rate was announced.
What Our Economist Says
"We believe the decision and the statement are consistent with at least another 50bps cut in the next meeting, which would bring the Selic to 5.5%. For now, we maintain our forecast for the policy rate to close this year at 5.5% -- but we do see risks tilted to the downside. Absent negative surprises on either the external, local or political fronts, the total easing may reach 125bps or 150bps, bringing the Selic to or close to 5% by end-2019."--Adriana Dupita, Latin America economist at Bloomberg Economics
In the last major consumer price reading before Wednesday’s decision, annual inflation in mid-July came in almost a full percentage point below this year’s target of 4.25%. The central bank’s own estimates published with the rate decision show inflation continuing below target next year even after additional borrowing cost reductions.
The dovish message should put pressure on the Brazilian real, as further rate cuts reduce the currency’s attractiveness for carry trade. Local rates should also see a downward adjustment to price in a more aggressive easing cycle, according to Brendan McKenna, a currency strategist at Wells Fargo in New York.
“Markets were really only prepared for a 25-bps cut and then a more patient BCB," McKenna said. "A 50-bps cut with intention for easing more is probably going to put pressure on BRL and push yields lower.”
Still, policy makers maintained a degree of caution in their comments. Aside from not explicitly committing themselves to more rate cuts, they warned that frustration of expectations over Brazil’s economic reforms could drive inflation higher.
A crucial pension overhaul that seeks to save government coffers some 900 billion reais ($236 billion) in a decade will be put to a second floor vote in the lower house in August before moving to the Senate. Lower house Speaker Rodrigo Maia said on Twitter that the central bank’s rate cut was facilitated by the bill’s advance through Congress.
Read more: Why the Future of Brazil’s Economy Rides on Pensions: QuickTake
"If everything stays the same, then there will be room for another half-point cut in September," said Thais Zara, chief economist at Rosenberg Consultores Associados. "But, the central bank leaves a little wiggle room."
--With assistance from Aline Oyamada and Igor Sodre.
To contact the reporter on this story: Mario Sergio Lima in Brasilia Newsroom at firstname.lastname@example.org
To contact the editors responsible for this story: Juan Pablo Spinetto at email@example.com, ;Walter Brandimarte at firstname.lastname@example.org, Matthew Malinowski, Robert Jameson
For more articles like this, please visit us at bloomberg.com
©2019 Bloomberg L.P.