Brazil’s Central Bank Continues Easing, Cuts Selic Rate to 12.25%
Cut of 0.75 percentage point was expected by all 14 economists surveyed by WSJ
People walk out of the headquarters of Brazil’s central bank in Brasília. PHOTO: UESLEI MARCELINO/REUTERS
Updated Feb. 22, 2017 6:32 p.m. ET
BRASÍLIA—Brazil’s central bank Wednesday cut its benchmark Selic interest rate to 12.25% from 13%, as expected, taking advantage of rapidly slowing inflation during a prolonged recession to slash the country’s high borrowing costs.
After holding the Selic at a nine-year high of 14.25% for more than a year, the central bank began its latest monetary-easing cycle in October. Following two quarter-point cuts in the fourth quarter of last year, the bank cut the rate by 0.75 percentage point in January and signaled it would maintain that pace for some time.
All 14 economists surveyed by The Wall Street Journal ahead of the decision had forecast a 0.75-point cut.
The bank said in its postmeeting statement that the trend in inflation is still favorable, and forecast an inflation rate of 4.2% at the end of this year, below its target of 4.5%.
The bank reiterated that pending fiscal reforms are “important” to a sustainable decline of the Selic, and said the international scenario is nevertheless still “quite uncertain,” a comment economists interpreted as a reference to U.S. President Donald Trump indicating the bank is unlikely to make deeper cuts, even as the economy tanks.
“Sticking to (the current pace) of cuts is compatible with two important uncertainties — domestic reforms and Trump’s still unknown economic policy,” said Jason Vieira, chief economist at Infinity Asset Management in São Paulo. “Making deeper cuts could undermine the bank’s credibility, which in turn has been key to anchoring expectations.”
The bank’s easing cycle gained strength after consumer-price increases began to slow last year, following two years of an almost steady climb. Brazil’s CPI peaked at 10.7% in January 2016 and fell to 5.02% by mid-February of this year.
Economists polled weekly by the central bank forecast an inflation rate of 4.43% at the end of the year, and a Selic rate of 9.5%.
Meanwhile, the economy is widely expected to have shrunk by 3.5% last year, following a 3.8% contraction in 2015. Final 2016 gross domestic product data is expected to be released in March.
The rapid slowdown in inflation over the past few months has raised pressure on the central bank to make even more aggressive cuts to borrowing costs, which remain some of the highest in the world.
Marcelo Carvalho, Latin America chief economist at BNP Paribas, said the difference between inflation and the Selic has traditionally been around 5 percentage points, which he says would be enough to keep prices under control. But to spur growth, that difference—now around seven basis points—would have to be even smaller.
“In terms of real interest rates…there is a lot of room for cuts,” he said. Mr. Carvalho expects inflation to end this year at around 4%, meaning the Selic would have to shed around four more points to support economic expansion. “We’d have to go below 8%,” he said.
But risks abound in an economy that has struggled with high inflation for generations. In the early 1990s, annual inflation reached 2,477%.
Ever since 2005, Brazil’s annual inflation target has been set at 4.5%, but the last time the country ended a year with inflation below that level was in 2009.
At the end of 2012, the central bank pushed the Selic rate down to 7.25%, even as inflation hovered above target, but the move soon fueled price increases and damaged the bank’s credibility.
But now, a government push for fiscal austerity is convincing markets there is a chance prices will remain under control.
President Michel Temer so far has managed to advance economic overhauls in Congress and is expected to make further progress given his large support among lawmakers.
“There is always a risk of inflation increasing, but with the reforms, markets are getting more confident,” said Nicolas Tingas, chief economist at Acrefi, a financial markets trade group. He said Brazil’s brutal recession also must be taken into account. “We may have a wave of bankruptcies” if borrowing costs remain too high, he said.
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