World Economy

Brazil CB Sees Scope for Rate Cut If Economy Improves

Brazil CB Sees Scope for Rate Cut If Economy ImprovesBrazil CB Sees Scope for Rate Cut If Economy Improves

Brazilian central bank President Ilan Goldfajn says the bank could begin easing his country’s monetary policy under the right conditions.

Goldfajn said on Thursday that he would wait to see the outcome of the government’s effort to restrain spending and monitor inflation, particularly inflation in the services sector, which is less affected by volatile commodity prices, Yahoo Finance reported.

“We will look at the forecast, and we will look at these factors, and we will make a decision,” he said on the sidelines of the International Monetary Fund’s and World Bank’s autumn meetings in Washington.

The Brazilian central bank held its benchmark Selic interest rate at 14.25% through the third quarter to fight inflation, despite a deep recession and uncertainty caused by political turmoil.

The political situation appears to have stabilized under President Michel Temer, who took over after former President Dilma Roussef was impeached in August. Many economists expect a rate cut by year’s end.

Economic output is expected to grow 1.3% next year, Goldfajn said. That should help rebuild trust in Brazilian institutions, he said. The central bank said last month that it expects Brazilian gross domestic product to shrink 3.3% in 2016. The country’s GDP shrank 3.8% last year.

And while inflation remains high, running at 8.96% in August, Goldfajn said he expects inflation to drift down over the next few years, eventually hitting the central bank’s 4.5% target in 2018. “There is also more confidence in the future, and that is reflected by expected inflation that’s going down.”

Much depends on a proposal working its way through the Brazilian congress to cap government spending growth at the rate of inflation. In the past, governments have routinely sought to prop up their economies with government spending financed by tax increases or foreign borrowing. That caused inflation and interest rates to rise and constrained private sector activity.

“I’ve been saying explicitly: look, if you do the fiscal reforms, that helps me in my disinflation process,” Goldfajn said.

Meanwhile, he said, Brazil needs to take advantage of low Fed interest rates to get its house in order. “For emerging markets, it’s actually a benign period.”

“We still have very low interest rates in advanced economies,” he said, adding: “there is this flight from zero interest rates that helps support some of our assets. We have a window of opportunity to do the reforms.”

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