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Brazilian interest rate decision due


Brazilian interest rate decision due

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Photo: REUTERS/Paulo Whitaker

The Central Bank of Brazil (BCB) is today expected to slash its key Selic interest rate by 25 basis points to a record low of 2%, in an extension of its third-longest easing cycle of the last decade.

The move arrives as Brazilian policymakers struggle to balance rising COVID-19 case numbers with a budding rebound indicated by June’s industrial output data, despite double-digit declines in key YoY indicators.

In the face of a historic recession, monetary authorities are left with little space to reduce rates further. Having leveraged the rate tool substantially over the last 12 months—with the initial intention of boosting lacklustre foreign investment under President Jair Bolsonaro—officials have room for only a marginal reduction, as recent adjustments had sunk Brazil’s domestic currency by a quarter before June’s stabilisation.

Expect today’s cut to preclude further rate manipulation for the foreseeable future. While some experts have pointed to the slight improvement in July’s consumer price data as an indication of a “V-shaped” recovery, the magnitude of Brazil’s forecasted 2020 contraction—albeit reduced—will likely preclude a more decisive rebound in the medium-term. Moreover, the bank’s rate-setting committee will likely wait until the third quarter of 2021 to bump the benchmark back to pre-pandemic levels, with delays to be expected in the event of a severe COVID-19 exacerbation.

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