Brazil Holds Key Rate at 6.50% As Prices Drop, Growth Drifts
(Bloomberg) -- Brazil held its benchmark interest rate unchanged at a record low amid a sharp downturn in inflation and feeble economic activity.
The bank board, led by its President Ilan Goldfajn, on Wednesday kept the Selic rate at 6.50 percent for the sixth straight meeting in a move expected by all 39 analysts in a Bloomberg survey. The meeting was one of the last under Goldfajn, who will step down from his position in the coming months.
In a statement accompanying the decision, board members wrote that the risk of slow growth leading to lower-than-expected inflation had increased. In addition, chances of stronger price pressures stemming from the possible frustration of domestic reforms had moderated.
"The Committee judges that various measures of underlying inflation are running at appropriate or comfortable levels. This includes the components that are most sensitive to the business cycle and monetary policy," policy makers wrote.
Brazil has withstood turbulence stemming from this year’s presidential vote and global investors’ stampede from risky assets. As the country’s currency weakened to a record low before the October vote, investors started betting on interest rate increases as early as this year. But the victory of Jair Bolsonaro, combined with tepid economic growth and faster-than-forecast deflation, eventually delayed such bets to end-2019.
"The statement had a more dovish bias in characterizing inflation," said Alberto Ramos, chief Latin America economist for Goldman Sachs. "With reforms moving ahead and a more stable external sector, the central bank will have space to normalize rates later than expected."
Just last week a key price gauge showed Brazil recorded deflation in November -- at a rate three times faster than forecast by economists. Inflation forecasts fell further this week, intensifying a trend that started with Bolsonaro’s victory on a platform that includes lowering debt and approving some form of a long-sought pension reform.
High unemployment and weak retail sales are also undercutting domestic price pressures in an economy still scarred by its deepest recession on record between 2015 and 2016.
Consumer prices are expected to remain at or below target through at least 2021, according to the latest central bank survey of economists. Low inflation, along with a small current account deficit and some $380 billion in international reserves, gives Brazil an advantage when confronting a challenging global environment marked by rising U.S. borrowing costs and threats of trade war, Goldfajn told lawmakers last week.
Goldfajn’s nominated successor, former Santander treasury director Roberto Campos Neto, adds to the benign outlook as investors consider he has the necessary credentials to continue the fight against inflation.
"It looks like the central bank has taken its finger off the trigger, with few concerns about shocks and risks," said Mauricio Oreng, senior Brazil strategist at Rabobank. "The central bank is watching the scenario to define its next decision, but with a stronger neutral bias now."
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