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Brazil Slashes Rates to Boost Flagging Economy

A large cut was always on the table given how drastically inflation has fallen over the past yearA large cut was always on the table given how drastically inflation has fallen over the past year

As had been widely expected, the Brazilian central bank cut rates a full 100 basis points, taking the headline policy rate to 11.25%.

There appears to be no dissent on the policy committee, with a unanimous vote and a statement indicating 100bps as the preferred rate of easing. A repeat then seems likely in May. Rates are now 300 bps lower than at the start of the easing cycle in October of last year, Yahoo Finance reported.

A large cut was always on the table given how drastically inflation has fallen over the past year, from a peak of 10.7% in January 2016 to 4.6% this March. With an upper inflation target of 6.5%, an economy clearly operating far below trend growth, and rates in the double digits, the speculation was that, if anything, further acceleration in the cutting cycle might be on the cards.

Perhaps one reason the central bank is happy to stick with the current pace of easing is its view that domestic activity has shown signs of stabilizing since its last meeting.

It is true that we have seen some modest improvement in purchasing managers indices, retail sales, and industrial production. The committee does however remain concerned about uncertainty on global growth and commodity prices. This is an important factor for Brazilian exports–though Brazil is not a heavily-trade dependent emerging market economy.

The accompanying text released by the central bank again stated that the length of the easing cycle would depend on estimates of the structural rate (to be assessed by the central bank over time), economic activity, inflation forecasts and expectations. The latter continue to fall, now at 4.1% for 2017 and 4.5% for 2018—in line with the bank’s own forecasts.

 

 

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