Brazil Keeps Key Rate Unchanged on Tame Prices and Weak Demand

(Bloomberg) -- Brazil held its benchmark interest rate unchanged on Wednesday and signaled that Congress needed to approve cost-cutting measures before borrowing costs can fall.

The bank board, led by its President Ilan Goldfajn, kept the Selic rate at 6.50 percent for a seventh straight meeting in a decision expected by all 42 economists in a Bloomberg survey. It was likely the last under Goldfajn, as the Senate this month is expected to approve President Jair Bolsonaro’s nominated successor.

In a statement accompanying the decision, the board members considered that "inflationary risks have moderated" since their last meeting, but they stressed that the "frustration of expectations regarding the continuation of reforms" could trigger price pressures.

"The central bank sees a better global outlook, but that’s still not enough," said Newton Rosa, chief economist at Sul America Investimentos Dtvm. "This throws some cold water on bets of a key rate cut."

The newly elected speakers of both houses in Congress have expressed support for a proposal to cut pension outlays that are the heart of Brazil’s budget woes. Yet it is far from clear if and when the government can muster the necessary majority in Congress to approve the constitutional amendment.

"The statement gives the impression that the central bank will sit through this phase of the pension reform, which could turn out to be longer than expected, before making any decision on the Selic," said Solange Srour, chief economist at ARX Investimentos.

Chief of Staff Onyx Lorenzoni said this week that the economy could see sustainable growth of 3 percent if the government’s reform agenda is passed. Still, a lower house lawmaker later said getting the necessary votes won’t be easy, as the administration needs to build a coalition of support in a fractious Congress.

Brazil Keeps Key Rate Unchanged on Tame Prices and Weak Demand

Economists recently switched their forecasts from an increase to a hold of the Selic rate as
inflation came in below expectations and the labor market weakened. In addition, emerging market jitters had eased and investors had become more optimistic with the Bolsonaro administration’s market-friendly discourse. Swap futures also show traders are already pricing in a mild bias toward a cut.

Since at least 1996, when the country’s current monetary policy board was created, no incoming bank governor has ever cut the benchmark Selic in his first meeting. Roberto Campos Neto, nominated to replace Goldfajn, may be no exception. He is expected to receive Senate confirmation and assume his post before the bank’s next monetary policy meeting in March.

But if Congress does play ball on the pension reform, Campos Neto will be able to move hard and fast, says Ivo Chermont, chief economist of Quantitas, a Porto Alegre-based asset manager. He sees the Selic dropping 100 basis points within three months of a favorable vote.

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