By CentralBankNews.info
Brazil’s central bank left its benchmark Selic rate unchanged at 14.25 percent, saying it will first start easing its monetary policy when it is more confident that inflation will decline to its target range, especially the 4.5 percent target for 2017.
The Central Bank of Brazil, which has maintained its rate since July 2015 as inflation decelerates, added that data since the July meeting of its policy committee – known as Copom – showed the country’s economy had stabilized and there was a possible pick up in activity although the economy continues to operate with a high level of slack.
But disinflation has evolved slower than the central bank had expected and Copom’s inflation forecast for this year has risen since July to around 7.4 percent while forecasts for the next two years have remained stable of declined.
Inflation for 2017 is forecast by the central bank to decline to around the 4.5 percent target though financial markets are looking for inflation of 5.1 percent, the bank said. This is down from markets’ expectation in July for inflation next year of around 5.3 percent.
Brazil’s inflation rate eased to a 2016-low of 8.74 percent in July from 8.84 percent in June and the lowest since May 2015. This year the central bank has a target range of 2 percentage points around midpoint target of 4.5 percent, but this range narrows to 1.5 points in 2017.
Among the domestic factors that Copom said it was keeping an eye on was the the shock from food prices on inflation was limited, that components of the consumer price index showed disinflation, that there is less uncertainty around the approval and implantation of necessary economic adjustments, including fiscal measures.
The central bank added that the decision to maintain the Selic rate was unanimous.
After depreciating from July 2014 until January this year, the exchange rate of Brazil’s real has been rising strongly and was trading at 3.23 to the U.S. dollar today, up 22.6 percent this year.
In March the central bank revived its intervention program in light of the strong gains in the real but earlier this month it scaled back the program by reducing the amount of reverse foreign-exchange swaps it offers.
On Aug. 12 Ilan Goldfajn, central bank governor, again said that only use its currency tools in a sparing manner when needed as it does not want to hurt the floating exchange rate regime.
The Central Bank of Brazil issued the following statement:
Brazil holds rate,to ease when confident of lower inflation
August 31, 2016
“The Copom unanimously decided to maintain the Selic rate at 14.25 percent per year, without bias.
The baseline scenario with which the Committee works can be summarized by the following observations:
The set of indicators released since the last Copom meeting shows evidence that the Brazilian economy has stabilized recently. It also points to the possibility of a gradual pick-up in economic activity. The economy continues to operate with a high level of economic slack;
The external outlook still offers a relatively benign environment for emerging economies. However, uncertainties regarding global economic growth and, especially, the pace of monetary policy normalization in the United States, remain;
Current inflation remains under pressure, partly due to food components. Disinflation has evolved more slowly than expected;
Inflation expectations collected by the Focus survey for 2017 fell since the last Copom meeting, but remain above the 4.5% inflation target. At longer horizons, expectations have dropped to around that level; and
The Committee’s inflation forecasts for 2016 in the reference and market scenarios increased since the last meeting, to approximately 7.3%. Inflation forecasts over the relevant horizons for the conduct of monetary policy have either remained relatively stable or decreased. In particular, under the assumptions of the reference scenario, 2017 inflation is projected at around the target of 4.5%. Under the assumptions of the market scenario, the forecast for 2017 inflation fell to 5.1%.
The Committee identifies the following domestic risks to the baseline scenario for inflation:
On the one hand, (i) higher-than-expected inflation in the short term, largely due to food prices, may show persistence; (ii) uncertainties regarding the approval and implementation of the necessary adjustments in the economy remain; and (iii) a prolonged period with high inflation and above-target expectations can strengthen inertial mechanisms and delay the disinflation process;
On the other hand, (iv) wholesale price indices point to the possibility of the shock to food prices fading, with favorable impacts on IPCA inflation; (v) the adjustments in the economy can be implemented more quickly, allowing confidence gains and reducing inflation expectations; and (vi) the level of economic slack may lead to disinflation at a faster pace than the one reflected in the Copom projections.
Taking into account the baseline scenario, the current balance of risks, and the wide array of available information, the Copom decided to maintain the Selic rate at 14.25 percent per year, without bias. The Committee judges that a loosening of monetary conditions will depend on factors that allow greater confidence on meeting the inflation targets at the relevant horizons for the conduct of monetary policy, in particular the 4.5% target for 2017. The Committee emphasizes the following domestic factors: (i) that the persistence of the impacts of the food price shock on inflation be limited; (ii) that IPCA components that are most sensitive to monetary policy and economic slack show disinflation at an appropriate pace; (iii) that the uncertainty regarding the approval and implementation of the necessary economic adjustments be reduced, including the composition of fiscal measures, and their effects on inflation. The Committee will assess the evolution of the combination of such factors.
The following members of the Committee voted for this decision: Ilan Goldfajn (Governor), Anthero de Moraes Meirelles, Carlos Viana de Carvalho, Isaac Sidney Menezes Ferreira, Luiz Edson Feltrim, Otávio Ribeiro Damaso, Reinaldo Le Grazie, Sidnei Corrêa Marques and Tiago Couto Berriel.”
