Brazil maintains interest rate plans, despite low inflation

Brazil maintains interest rate plans, despite low inflation

Corporate & Sovereign Strategy Economy & Policy Brazil

Brazil’s Central Bank foresees cutting interest rates one last time this year, as inflation stays below target and lingers at its lowest levels since 1994.

“As far as we are concerned, there is no change to the outlook,” Central Bank President Ilan Goldfajn told journalists in a conference call on Wednesday. “For the next meeting, we expect to make another reduction… And then we expect a pause.”

Copom, the central bank’s monetary policy committee, trimmed the benchmark Selic rate by 25bp to 6.5% in March. The committee will likely knock another 25bp off the Selic at its next meeting on May 15-16, “unless conditions change,” Goldfajn said.

After that, Copom is expected to hold the Selic steady at 6.25%, the lowest level since the central bank introduced the benchmark rate in March 1999.

Brazil’s consumer price index, or IPCA, rose just 0.09% in March, falling off from a 0.32% increase in February, the national statistics agency IBGE said on Tuesday. Inflation stood at 0.7% in the first quarter of 2018 and came to 2.68% in the 12 months through the end of March this year, IBGE said.

As the Brazilian economy recovers, however, the central bank expects inflation to pick up speed, Goldfajn said. The bank sees inflation reaching 3.8% in 2018, before it goes to 4.1% in 2019 and 4% in 2020, he said.

After two years of recession, the Brazilian economy grew 1% in 2017, but it is slated to expand 2.8% in 2018 and 3% in 2019, Goldfajn said. “We believe the recovery is consistent, but it is not a straight line,” he said.

Trade negotiations and lower interest rates in the United States could influence Brazil’s economic recovery, but the effect has been minimal so far. “The scenario is still benign, but we cannot expect the benign scenario to continue forever,” Goldfajn said.

He added that Brazil has put buffers in place to help protect it from external shocks, building reserves to 20% of GDP and reducing its foreign exchange swaps. “We have enough ammunition to deal with any scenario ahead,” he said.

Goldfajn also said Brazil needs to stick to reforms if it wants to maintain low inflation and low interest rates, touting changes to labor laws and the introduction of a new long-term lending rate at the national development bank BNDES.

President Michel Temer said in March that Congress could vote on a pending social security reform bill in September or October if he lifts a military intervention in the state of Rio de Janeiro before then. Temer authorized the military to take over security in Rio through the end of the year when he announced the federal intervention in February. LF