Brazil’s central bank cut its key interest rate by a quarter point to an all-time low and didn’t rule out additional reductions as policy makers seek to stimulate an economy ravaged by the coronavirus pandemic.
The central bank, led by its President Roberto Campos Neto, on Wednesday lowered the benchmark Selic to 2% following back-to-back reductions of 75 basis points, as forecast by 33 of 37 economists in a Bloomberg survey. The other four analysts expected borrowing costs to remain steady.
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“The remaining space for monetary policy stimulus, if it exists, should be small,” policy makers wrote in a statement accompanying the decision. “Consequently, possible future adjustments to the current degree of monetary stimulus would occur with additional gradualism and would depend on the perception of the fiscal trajectory.”
Board members also don’t foresee reductions in the monetary stimulus unless inflation expectations come close to the official target, according to the statement.
The bank is striking a more cautious tone as it delivers a ninth straight rate cut to mitigate the economic collapse from the pandemic. Consumer prices are seen below target until 2022 as rising unemployment and an ongoing virus outbreak keep demand in check. Yet policy makers are also monitoring the risk that the unprecedented level of public spending during the crisis could be extended into the next year, possibly fueling inflation.
“The fiscal outlook is uncertain, and that’s a reason for them to observe the effects of the easing,” Newton Rosa, chief economist at Sul America Investimentos Dtvm, said before the rate decision. “The central bank indicated it will be more cautious in its assessment of activity and other economic indicators.”
The coronavirus has forced President Jair Bolsonaro’s administration to postpone plans to cut debt and boost fiscal accounts. Instead, the government is ramping up emergency expenditures with proposals that may include an extension of popular, yet costly, monthly stipends for informal workers.
Brazil has recorded over 2.8 million virus cases and more than 95,000 deaths from Covid-19 as the pandemic spreads across the country, making it the worst global hostpot after the U.S. Meanwhile, Latin America’s largest economy is expected to contract by 5.66% this year, according to analysts surveyed by the central bank.