Brazil's central bank could cut rates below target

Brazil's central bank could cut rates below target

Economy & Policy Regulation Coronavirus Capital Markets Brazil

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Brazil's central bank could lower the benchmark Selic interest rate below a previously expected floor of 2.25% to help lessen the impact of the coronavirus pandemic on the economy, a bank official said on Wednesday.

At its last meeting in May, the central banks' monetary policy committee, or Copom, cut the Selic by 75 basis points to a record low of 3% in May and suggested it could lower it by the same amount in June and hold it there through the end of the year.

"I didn't see this 2.25% as something that was written in stone and something fixed that we have in mind that we cannot cross," Fábio Kanczuk, the deputy governor for economic policy, said during a webinar hosted by the Brazilian-American Chamber of Commerce.

Two Copom members advocated for a cut of 150 basis points at the May meeting, but the committee decided for a more moderate reduction.

"People don't have a clear number, people disagree, and it is a dynamic number as you change your views," Kanczuk said. "In my mind, it was more related to the optimum monetary policy, thinking about the output gap and risk neutral rate, not as a limit to do monetary policy," he added.

A pressing concern, according to Kanczuk, is Brazil's mounting public debt, which could rise to more than 90% of GDP before starting to decline in the future. Brazil's national debt reached a record high of 79.7% of GDP in April, according to figures released by the central bank in late May.

"This is the big issue to think about our storm, much more than the private debt," he said.

Nevertheless, Kanczuk said he does not expect the country to breach spending limits next year after ramping up emergency spending to fight the coronavirus over the last two months.

Kanczuk said factors such as the recent rebound in the price of oil, appreciation of the local currency and low inflation have helped lessen the impact of lower GDP growth and a higher debt-to-GDP ratio.

At the next Copom meeting, scheduled for June 16-17, "we will see if there is a financial stability issue," Kanczuk said. "From the previous meeting until now, it is fair to say that growth seems to be smaller and the recession deeper, but on the other hand the fiscal expansion seems to be bigger than the one we had before," he added.

Speaking of the central bank's response since the first cases of coronavirus were reported in China, Kanczuk said Copom had to rapidly shift from seeing the coronavirus as a foreign crisis that may impact commodity process, to a domestic crisis with the potential to create a significant labor and demand shocks in the economy.

"During the Copom meeting [in February], we were still questioning how relevant the crisis was and how big it was. I remember one of the members of Copom came wearing a mask and we thought he was crazy," said Kanczuk via webcam from his home.