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Central bank eases as board
member disagree
On 20 February, the Central Bank Monetary
Policy Committee (COPOM, Comitê de Política Monetária) decided to lower
the benchmark overnight rate (SELIC) from 19.0% to 18.75%, the first cut
since January last year. However, the decision to cut the interest rate
was not without controversy, as the COPOM voted five-to-three to support
the monetary easing, the first vote sine July 2000 that was not
unanimous. The dissenting members remain concerned about inflation,
arguing that lower borrowing costs may serve to boost inflationary
pressures once economic activity picks up. In addition, the dissenters
argue that the uncertainty in neighbouring Argentina warrants caution,
particularly given the potential contagion on the real. Supporters of the
interest rate cut argued that the gradual downward trend in inflation of
the past three months, the stabilization of the currency and the easing of
earlier price pressures resulting from adverse weather and rising
administered prices, warranted the downward adjustment of the benchmark
interest rate. Participants expect the downward trend in interest rates
to continue this year in line with the lower inflationary outlook. As a
result, the SELIC rate is anticipated to drop a further 200 basis points
by year-end.
Inflation on a downward
trend as currency stabilizes and upward pressures ease
In January, the Central Bank outlined its
inflation targeting objectives for this year, which set the central
inflation target at 3.5% with a margin of error of plus or minus two
percentage points. Despite stated optimism in the 20 February COPOM
minutes about the likely downward trend in inflation, the Central Bank
revised its inflation outlook upward, stating that monetary policy should
target an inflation rate between 4.0% and 4.5% instead, which remains
within the original target range but raises the question as to why the
Central Bank eased monetary policy rather than maintain interest rates at
levels needed to comply with original monetary policy objectives. The
Central Bank’s explicit concern about the inflationary outlook for this
year – reflected not only in the revision of the monetary policy inflation
target but also the lack of unanimity in the decision to cut - and the
fact that the target was overshot last year, indicates that the decision
to ease may have been precipitated. Nevertheless, initial February
inflation data show that the downward trend in inflation seems to be
intact. The mid-February consumer price index (IBGE-IPCA 15), which
covers monthly price increases up to the 15th of every month, increased
0.44% over January, when consumer prices for the same period rose 0.62%.
The mid-February figure lowered the annual inflation rate from 7.5% in
January to 7.4% in February. According to Consensus data, inflation this
year is likely to continue dropping.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Brazil. For more details please click here.
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