Brazil Keeps More Easing in Play Amid Precarious Recovery
Brazil Cuts Key Rate to Record 2% With Virus Shrouding Recovery
(Bloomberg) -- Brazil’s central bank said it may consider another small cut to its key interest rate to boost an economy ravaged by the coronavirus, depending on prospects for public finances and inflation.
The bank led by President Roberto Campos Neto on Wednesday lowered the benchmark Selic rate to an all-time low of 2% in an easing cycle that’s shaved 450 basis points off borrowing costs. Policy makers wrote in an accompanying statement that recent indicators point to just a partial recovery, and warned that more government spending in response to the pandemic risks faster-than-expected inflation.
“The remaining space for monetary policy stimulus, if it exists, should be small,” policy makers wrote in the statement. “Consequently, possible future adjustments to the current degree of monetary stimulus would occur with additional gradualism and would depend on the perception of the fiscal trajectory.”
Board members also don’t foresee reductions in the monetary stimulus unless inflation expectations come close to the official target, according to the statement. The central bank targets inflation at 3.75% next year and 3.5% in 2022 and economists surveyed by the bank currently don’t see the targets being reached before 2022.
The bank is striking a cautious tone as it delivers a ninth straight rate cut to mitigate the economic collapse from the pandemic. Consumer prices remain subdued as rising unemployment and the ongoing virus outbreak keep demand in check. Yet policy makers are also monitoring the risk that the unprecedented level of public spending during the crisis could be extended into next year.
“The central bank left the door open to more easing in language that points to a cut of a maximum of 25 basis points,” said Banco MUFG Brasil chief economist Carlos Pedroso. “The main risk is fiscal in nature. It will be very important to see 2021 government budget proposals starting in September.”
Postponed Plans
The coronavirus has forced President Jair Bolsonaro’s administration to postpone plans to cut debt and boost fiscal accounts. Instead, the government is ramping up emergency expenditures with proposals that may include an extension of popular, yet costly, monthly stipends for informal workers.
Read more: Brazil $50 Billion Worker Aid Plan Is About to Get Costlier
Brazil posted its third straight record budget gap in June, according to the Treasury. Economy Minister Paulo Guedes has warned that the nation’s nominal budget deficit, currently at 11.38% of gross domestic product, may surpass 15% this year.
What Our Economist Says
“The BCB slammed the door shut for interest rate hikes for the foreseeable future, and left it slightly ajar for a new rate cut. We don’t expect the BCB to cut the rate again though: with all indications pointing to pressures for increased fiscal stimulus and stalled reforms, we don’t expect a comfortable scenario for a rate cut in September. We continue to forecast the Selic at 2% through at least end-2021.“
--Adriana Dupita, Latin America Economist, Bloomberg Economics
Brazil has recorded over 2.8 million virus cases and more than 97,000 deaths from Covid-19 as the pandemic spreads across the country, making it the worst global hotspot after the U.S. Meanwhile, Latin America’s largest economy is expected to contract by 5.66% this year, according to analysts surveyed by the central bank.
In their statement, policy makers wrote that growth concerns may linger into next year, and that sectors more directly affected by social distancing measures remain depressed. More broadly, the global economy is facing its most severe downturn since the Great Depression.
Meanwhile, Brazil's national statistics agency reported on Thursday that the unemployment rate in the three months through June rose to 13.3%, marking the highest level in over three years.
“In the end, the central bank is communicating that rates will be at this level or lower for a prolonged period,” said Gustavo Pessoa, a founding partner at Legacy Capital.
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