Largest Interest Rate Cut in 8 Years Announced in Brazil

By Lise Alves, Senior Contributing Reporter

SÃO PAULO, BRAZIL – As predicted by economists, Brazil’s Central Bank lowered the country’s benchmark interest rate (SELIC) for the fifth consecutive time on Wednesday. The Bank’s Monetary Policy Committee (COPOM) decided unanimously to reduce the SELIC by one percentage point to 11.25 percent, the largest reduction taken in eight years.

“The Central Bank’s decision to slash the SELIC rate to 11.25 percent was widely expected as rapidly easing inflation has given the Bank space to ease monetary policy to support an economic recovery,” Angela Bouzanis, Senior Economist at Focus Economics told The Rio Times

In a statement released immediately after the meeting, the monetary authority noted that ‘the process of disinflation [inflation slowdown] spread and there was a consolidation of disinflation in the components most sensitive to the economic cycle and monetary policy’.

The note also said that the behavior of inflation remains favorable and the disinflation in food prices constitutes a favorable supply shock. With the latest reduction, the SELIC returns to levels seen in December of 2014.

The COPOM document also stated that the approval and implementation of government reforms, especially those of fiscal nature and adjustment in the economy, are “relevant to the sustainability of disinflation and to the reduction of the structural interest rate.”

According to economists one of the reasons for the continuing reduction of the SELIC is the on-going decline in the country’s inflation, measured by the consumer price index (IPCA).

In March the IPCA index registered a 0.25 percent inflation, the lowest level for the month since 2012.

In the Inflation Report released by Brazil’s Central Bank at the end of March, the monetary authority estimates that the IPCA will close 2017 at four percent, below the Bank’s 4.5 percent target.

For financial institutions surveyed by the Central Bank for the preparation of the entity’s weekly Focus bulletin, official inflation is expected to close the year at 4.09 percent.

Lower inflation and the expected economic reforms should translate into an even lower benchmark interest rate in the coming months, say economists.

“Benign inflation, weak economic activity and an improving fiscal trajectory should allow the Bank to continue its easing cycle over the course of this year, and the FocusEconomics panel of analysts sees the SELIC rate ending 2017 below 9.00 percent,” concluded Bouzanis.