CHART OF THE WEEK
The members of the Central Bank of Brazil’s Monetary Policy Committee (Copom) decided to maintain the Selic rate at 6.50% during their latest meeting on 16 May. Consensus expectations were for a 25 bps cut.
This decision was unanimous and puts a halt to twelve consecutive rate cuts since October 2016 (-775 bps in total). In its statement, the central bank indicated that the rate will be held steady over the next set of meetings, marking an end to the easing cycle.
The Copom members took the decision based on a shift in the balance of risks to inflation. In recent weeks, the Brazilian real (BRL) has been falling at a faster pace (-12% against the dollar since the previous Copom meeting on 21 March), which has lowered, but not jeopardised, the probability of the central bank’s inflation scenario materialising (4% in 2018 and 2019, with the USD/BRL rate at 3.60 versus 3.67 currently, and an unchanged Selic rate).
OUR ANALYSIS
The Central Bank of Brazil can expect to gain in credibility as it chooses the path of caution over economic stimulus, despite recognising that the latest economic data indicate softer first-quarter growth.
Emerging market central bankers have seen their delicate task further complicated by a broad-based decline in their currencies in recent weeks, which could translate into an unwelcome rise in inflation.
The risk is all the more significant for countries with already high levels of inflation, such as Turkey. Tightening monetary policy at the end of April has failed to steady the weakening lira and a significant rate hike could be on the cards. The snap Turkish elections to be held on 24 June 2018 only complicate matters further.
The opinion expressed above is dated 17 May 2018 and is liable to change.
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