RIO DE JANEIRO, BRAZIL – Brazil’s central bank cut its benchmark interest rate from 6.5 to six percent on Wednesday, July 31st, — the lowest rate since 1986.
The lower rate came amid an economic slowdown that has been more notable than expected, and a government push for social security reforms, which are currently in the process of congressional approval.
The reduction from 6.5 percent was the central bank’s first rate cut since March 2018, following significant progress on domestic fiscal reforms and looser monetary policy abroad, including the U.S. Federal Reserve’s rate cut earlier in the day.
Given record-low interest rates and the prospect of further declines, the Real weakened against the Dollar to 3.81.
Brazil now joins countries (ranging from the U.S. to South Africa to Indonesia) whose central banks are lowering borrowing costs as global activity slows. Local policymakers are rushing to the aid of an economy that is expected to grow less than one percent this year, struggling against headwinds including high unemployment, low confidence, and weak investments.
President Jair Bolsonaro has been saying for some time that lower interest rates would be positive for the economy and is pleased with the Central Bank’s decision, his spokesperson Otavio Rego Barros told reporters after the new rate was announced.
The inflation forecast for this year was also adjusted from 3.82 percent to 3.78 percent, the survey said.
As the projected inflation fell within the official target of 4.25 percent, analysts believe there is still ample room for new cuts to the benchmark interest rate.
The rate may drop further, to close at 5.5 percent by the end of the year, analysts said . The outcome of the pending welfare pension reform legislation will be decisive for future interest rate formation.