World Economy

Brazil to Step Up Monetary Easing

Brazil’s economy has contracted nearly 8% in two years.Brazil’s economy has contracted nearly 8% in two years.

Brazil’s central bank is widely expected to speed up monetary easing on Wednesday, taking advantage of slowing inflation to try to revive an economy still struggling with its deepest recession on record.

All but one of the 47 economists polled by Reuters expected the bank to cut its benchmark selic rate by 100 basis points to 11.25%—the lowest in nearly three years. One analyst forecasts a 125 basis-point cut.

Despite pressure from some economists and politicians for an even bolder rate cut, the central bank has said in recent weeks it aims for a “moderate intensification” of the rate-cutting cycle after two straight cuts of 75 basis points.

“The consolidation of the disinflation scenario, in an environment of anchored expectations and weak activity, opens space for an intensification of the monetary easing pace,” economists with Banco Itau said in a research note.

Other economists expect at least two more 100 basis-point cuts to fight falling credit and rising unemployment. The painfully slow recovery has turned into a headache for President Michel Temer as he races to gain support for economic reforms to win back Brazil’s investment-grade rating.

Brazil’s economy has contracted nearly 8% in two years, helping drive consumer inflation to the 4.5% mid-point of the official target after reaching double digits in 2016. Inflation expectations have also eased dramatically, convincing Temer that it is time to reduce the official inflation target for 2019 to bolster his administration’s credibility.

Slower inflation has allowed central bank chief Ilan Goldfajn to concentrate on growth, with economists forecasting the selic falling as low as 8.50% by the end of the year. The bank has cut rates at its last four meetings.

Still, the pace of rate cuts could depend on the approval of Temer’s reform agenda, including an overhaul of the country’s pension system that is already facing resistance in Congress.

“We think that pension reform will become a key influence for the monetary policy trajectory,” wrote Sacha Tihanyi, an economist with TD Securities, adding that a failure or delay to approve the reform could stoke inflation via a weakening of the Brazilian real. The Brazilian economy is expected to grow just 0.4% this year before picking up speed to 2.5% in 2018, according to a weekly central bank poll of economists.

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