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On October 19th, the members of Brazil’s Central Bank Monetary Policy Committee (Copom) unanimously voted to cut its benchmark interest rate (Selic rate) by 25 bps to 14%. Despite an economic slowdown, high inflation has hindered the central bank pursuing any downward rate path since bringing the Selic to an historic 7.25% low. Most analysts had been predicting a rate cut, with approximately one third expecting it to drop by 50 bps.
Slower inflationary pressures facilitated the central bank’s monetary policy easing: inflation fell from 10.7% year-on-year in December 2015 to 8.5% in September 2016. The decision by Brazil’s Congress to proceed towards a constitutional amendment capping government spending also swayed the Copom in favour of a cut. Disinflation will likely continue given the currency’s almost 25% gain against the USD year-to-date, a weak economy, positive comparison effects for government-regulated prices, and lower inflation expectations. This means that the Central Bank of Brazil should be able to continue easing monetary policy in the months ahead. The Copom statement nonetheless remained cautious. It indicated that moderate and gradual reductions to the Selic rate should enable inflation to slow to the official 4.5% target and added that faster rate reductions would depend on service sector disinflation and the government’s progress on fiscal reforms.
The opinion expressed above is dated October 24th, 2016 and is liable to change.
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