Brazil's central bank suggests more rate cuts to come

Brazil's central bank suggests more rate cuts to come

Economy & Policy Regulation Coronavirus Capital Markets Brazil

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The monetary policy committee at Brazil's central bank said it could cut the benchmark Selic interest rate by as much as another 0.75% at its next meeting in June "to counteract the economic consequences of the COVID-19 pandemic."

The committee, known as Copom, unanimously voted to lower the Selic by 0.75 basis points to 3%, a record low, on Wednesday, concluding that the economic slump calls for "an unusually large monetary stimulus," it said in a statement. Economists were forecasting a 50 bps cut to the Selic.

Two members on the committee advocated for a cut of 150 bps but Copom said it "chose to provide a more moderate stimulus."

Meanwhile, inflation could fall short of the target range if the economy remains sluggish for a prolonged period, but it could rise above expectations if the government's response to the coronavirus pandemic jeopardizes economic reforms, Copom said.

Copom expects inflation to come to 2.4% in 2020 and 3.4% in 2021, while the Selic ends the year at 2.75% and next year rises to 3.75%.

"In our assessment, more than growth and inflation it will be the fiscal, FX, and capital account developments that will be key to determine whether the Copom cuts another 75bp, or less than that," Alberto Ramos of Goldman Sachs wrote clients late on Wednesday.

"Overall, Brazil is moving rapidly towards a zero real rates uncharted financial territory. The economy never operated in such an environment. It may turn out that the new territory is market friendly and hospitable, but we do not know until we operate there for a bit," he said.

The Brazilian real steadily lost ground ahead of the Copom decision. It was around 5.7140 reais to the greenback, just shy of an all-time low reached last month.