BUENOS AIRES – Brazil’s central bank will cut its benchmark interest rate by another 50 basis points on Wednesday to help Latin America’s No. 1 economy as it falls into a rapidly expanding recession because of locking action, a Reuters poll showed.
With activity that has experienced the deepest quarterly decline and companies can barely sell their goods and services, inflation is no longer a threat that will prevent further monetary easing. [ECILT/LTAM]
The central bank’s policy committee, known as Copom, will extend the rate cut cycle opened last year to ignite an economy that had lagged before the coronavirus pandemic, undermining President Jair Bolsonaro’s promise for growth.
“The gravity of the situation has become clearer since the last meeting of Copom,” said Etore Sanchez, chief economist at Ativa Investimentos in Sao Paulo. “Critical economic conditions will apply in policy decisions.”
In a sign of how quickly economic conditions are declining, Brazil’s unemployment rate rose to 12.2% in the three months to March, marking the biggest increase in three years even though coronavirus is not a major factor.
The expected reduction will be the 7th since July, when the Selic rate stood at 6.50%, and left it at a record low of 3.25% after cutting the same percentage point half at a meeting scheduled in March, according to 26 economists surveyed April 27-30.
Copom is then expected to drop again to 3.00% at some point this quarter, below the end of the 3.25% cycle rate expected in a previous Reuters poll in April, and to stay there for the full year before gradually starting to tighten.
But this approach has caused side effects with a real crash of 27%
Such a large depreciation will trigger inflation in other circumstances, such as in the 1980s or in present-day Argentina, neighboring Brazil. However, the contraction associated with the corona virus has left Brazilian companies without price power.
“Despite the obvious weaknesses, inflation expectations continue to fall, providing space for the Brazilian central bank to loosen further,” Citi analysts wrote in a report this week. Selling US dollars also eased pressure from falling currencies, he added.
Inflation will probably average 2.7% in the second quarter, the lowest for a three-month period since 2017, when bumper harvests reduce food prices, according to a Reuters poll. Gross domestic product (GDP) is seen collapsing 5.7% in April-June.
The worrying prospect has prompted Congress to start debating a bill to give the central bank emergency power to undertake “quantitative easing” or QE as part of its weapons that are fighting the crisis.
So far, Roberto Campos Neto, the bank’s president, has ruled out bond purchases widely, saying any action would be similar to his foreign exchange intervention in times of acute market pressure.
Officials want to allay fears they will start printing money directly. “This will be limited to the secondary market, we see this as a positive measure,” said Victor Beyruti, an economist at Guide Investimentos in Sao Paulo.
(Reporting by Gabriel Burin; Editing by Nick Zieminski)
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