Copom cuts its key rate to record low

BRASILIA: Brazil’s central bank cut its benchmark interest rate by 25 basis points to a record-low 2% on Wednesday, but warned there was little or no room for further monetary stimulus to support an economy ravaged by the coronavirus pandemic.

That marked the smallest rate cut since Covid-19 hit Brazil and was widely expected after policymakers said in recent weeks that further easing could threaten financial market stability.

Although policymakers said again that financial stability concerns could prevent further rate cuts, they did not close the door completely, underscoring the extreme uncertainty about a recovery amid the world’s secondbiggest coronavirus outbreak.

“The remaining space for monetary policy stimulus, if it exists, should be small,” Copom wrote in their decision on Wednesday. Policymakers added that any future rate cuts “would occur with additional gradualism” and would depend on the evolving outlook for inflation and public spending.

Policymakers said recent economic indicators in Brazil point to a “partial recovery,” but noted that uncertainty remains high, especially around the end of the year when emergency fiscal stimulus is expected to wind down.

“There is little to gain from further accommodation at this level given financial stability risks, but they were slightly more dovish than expected,” said Drausio Giacomelli, head of emerging market research at Deutsche Bank in New York.

“They are acknowledging the recovery will be gradual and inflation risks are very subdued. There is no pressure for any policy normalization, and I would expect them to be on hold for a long time,” he said.

Brazil’s economy is expected to shrink this year at the fastest pace on record, with forecasts ranging from the government’s -4.7% to the International Monetary Fund’s -9.1%.

Central bank president Roberto Campos Neto has said the bank’s own forecast of -6.4% now looks too pessimistic.

In its statement, the bank’s rate-setting committee known as Copom said its “hybrid” forecasting model, using market-based interest rate forecasts and a constant exchange rate of 5.20 reais per dollar projected inflation around 1.9% this year and 3% next.

In June, using a market-based rate outlook and a stronger constant exchange rate of 4.95 reais per dollar, Copom projected inflation of around 2% this year and 3.2% next.

The central bank’s official 2020 and 2021 inflation goals are 4% and 3.75%, respectively. Copom expects inflation to get closer to target in 2022.

The rate decision was unanimous. Thirty-five of the 41 economists in a Reuters survey predicted the move, while six had expected policymakers to hold the rate unchanged.