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Brazil Central Bank Slashes Selic Rate 50bp, Signals Future Cuts

Brazil Central Bank Slashes Selic Rate 50bp, Signals Future Cuts

2019-08-01 03:30:00
Dimitri Zabelin, Junior Currency Analyst
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BRAZIL CENTRAL BANK, FOMC RATE DECISION – TALKING POINTS

  • Brazil central bank surprised investors and cut the Selic rate by 50 basis points
  • Slower local and global growth, pension reform optimism supports dovish policy
  • Brazil stocks, Brazilian Real may find themselves torn between dovish BCB, Fed

See our free guide to learn how to use economic news in your trading strategy!

BRAZIL CENTRAL BANK SURPRISES MARKETS: SLASHES SELIC RATE 50BP

Investors were caught off-guard when Banco do Brasil announced that it was slashing its benchmark Selic rate from 6.50 percent to 6.00 percent, the first reduction in borrowing costs since March 2018. Slower-than-expected price growth, a decelerating global economy, high “economic slack” and optimism about the market-disrupting pension reforms were the main reasons by the cut.

Banco do Brasil Cuts Selic Rate For First Time in Over a Year

Brazil Selic Rate

The unanimous decision came as a surprise, with most economists having estimated that the 9-committee Copom council would have favored a 25bp cut. The monetary policy statement put out by the central bank showed officials’ baseline scenario is a gradual recovery with “Economic conditions prescrib[ing] stimulative monetary policy, i.e., interest rates below the structural level”.

Optimism about the pension reform bill being signed into law and the anticipation that it will lead to significant capital inflow and a strong Brazilian Real was also a contributing factor. The bill survived a first-round vote in the lower house of Congress this month and is expected to undergo a second one next week. In their monetary policy statement, officials at the central bank highlighted the importance of these reforms on policy:

The Committee stresses that the perception of continuation of the reform agenda affects current expectations and macroeconomic projections. In particular, the Committee judges that concrete progress in this agenda is fundamental for the consolidation of the benign scenario for prospective inflation.

Given the central bank’s inflation expectations for 2019 through 2022, officials forecast the Selic rate will fall to 5.50 percent by the end of the year. However, if the fundamental outlook deteriorates it could force officials to adopt an even-more accommodative monetary policy. However, as a relatively closed economy, Brazil is comparatively more insulated from global shocks relative to some of emerging market peers.

Looking ahead, when Brazilian stock markets open, the Real will likely gap lower against the US Dollar while local equity markets may be buoyed by the prospect of cheap credit. However, if the Ibovespa fails to rally, it be an indication that investors in Brazil were more focused on the Fed than their local central bank’s monetary policy. Considering 80 percent of all global transactions are conducted in USD, this would not be shocking.

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--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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