2017.06.2308:41:00UTC+00BRAZIL: Central Bank Points Again To Slower Pace Of Interest Rate Cuts

The Brazilian central bank stated again, this time in its quarterly inflation report, that the benchmark interest rate (Selic) will probably fall less rapidly in the next monetary policy committee meeting. In May, the central bank cut the interest by one percentage point, to 10.25% per year.

"The recent increase in the uncertainty, associated with the necessary reforms evolution and adjustments in the Brazilian economy, makes it harder for structural interest rate estimates to fall faster and makes them more uncertain," said the central bank report.

Bank of Tokyo-Mitsubishi believes that the Brazilian central bank reinforced the view that Selic will fall by 0.75 percentage point, to 9.5% per year, at the next monetary policy meeting, and decrease by another 0.5 pp in September, remaining at 9% in the following months.

Carlos Viana, Brazilian central bank's director of economic policy, pointed out that there is no commitment with a future decision. According to him, the quarterly report only recalled the message from the monetary policy decision on May 31. He also said that it is relevant "to understand the factors that will be critical to the decision" from now on.

He added that the increase in political uncertainties does not worry the central bank, but the economic impact of these issues does.

The central bank report added that inflation expectations remain anchored.

In the reference scenario, with a constant exchange rate at R$ 3.30, the expected inflation for 2017 is at 3.8%, the same as in the previous report. By 2018, the forecast falls to 4.3%. In the market scenario, projections are at 3.8% for 2017 and 4.5% for 2018. In both cases, the odds of inflation breaking the ceiling inflation target are at 1%.

The central bank kept its growth projection for the Gross Domestic Product at 0.5% in 2017 due to the favorable results in activity indicators since the beginning of the year but states in the report that an uncertainty environment could hurt economic performance if maintained over a prolonged time.