Brazil keeps interest rate at 6.5 per cent in surprise move

BRASÍLIA: Brazil’s Central Bank ended a run of 12 consecutive interest rate cuts, maintaining the key Selic rate at 6.5 per cent Wednesday in a decision that surprised the market.

Analysts had broadly expected one more cut to 6.25 per cent. The decision reflected what the bank’s committee said was ‘volatility’ at a time of weak recovery from Brazil’s worst recession on record.

The Central Bank has mounted a sustained campaign to breathe life into the moribund economy, slashing the Selic all the way from 14.25 per cent in October 2016, a time when the country faced not only negative economic growth but high inflation.

Analysts said the currently rockbottom inflation – 2.76 per cent in April, which is well below the official three per cent target – would have given the bank a chance to lower rates one more time.

The Fiesp and Ciesp, two industrial federations in the economic center of Sao Paulo, criticized the Central Bank’s caution.

“Maintaining the Selic will delay even more the reduction in the cost of credit. We see a risk of the economic recovery dying just when Brazil was trying to get out of its worst crisis,” they said in a statement. “Growth is still very fragile... (and) expensive credit works against the country.”

But analysts were factoring in the near certainty that the bank would pause cuts at the next meeting, even if not at this one, due to potential new inflationary threats.

These include possible rate hikes in the United States, the increase in oil prices and devaluation of the national currency, the real, analysts say. The real has lost 10 per cent of its value against the dollar since January.

Another factor spooking the bank is the absence so far of a strongly pro-markets presidential candidate in elections due in October and the stalling of current President Michel Temer’s austerity reforms. — AFP