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Brazil Central Bank to Leave Rates Unchanged

Brazil’s central bank plans to leave its key interest rate unchanged. It will still be at a record low of 2.0% next week. The bank awaits to see how a nascent economic recovery evolves. Albeit, most economists polled now see rate risks skewed to the upside.

Brazil Central Bank Copom is the bank’s rate-setting committee set to give equal weight at its policy meeting on Wednesday. It was proof of an uptrend in consumer prices and signs pointing to a pick-up in retail sales. Moreover, it occurred in industrial production and other sectors.

Brazil faced the second highest death toll in the world after the United States. Latin America’s No. 1 economy is now emerging from the worst of this year’s coronavirus wave.  This is with some help from the bank’s ultra-dovish stance and the huge government spending drive.

The 31 respondents in the Oct. 12-15 survey forecasted the Copom would keep the key Selic rate at 2.0%. That is for a second month after an easing campaign that started last year even before the COVID-19 shock.

Consumer prices have gained traction. They rose four consecutive months to an annual clip of 3.14% since slowing to the weakest in over two decades. That was during May amid the economic freeze from the virus’ impact.

This however, is still within the bank’s target of 4%. It has a margin of tolerance of 1.5 points higher or lower. 

Meanwhile, the country’s economic recovery is still very fragile and exposed to potential setbacks.

Too Early for Hawkish View

As in September’s survey, the Selic was forecast to rise to 2.25% in Q3 of next year. Then it was predicted to rise 3.0% in the final three months of 2021. Moreover, forecasts expected a climb by 25 basis points increments thereafter.

Out of 18 economists, 15 saw rate risks in the next 12 months tilted to the upside. Three saw them as neutral, and none skewed to the downside.

From the last survey, this represented a significant change. The last survey showed a majority of economists had inclined toward a neutral bias. It was in line with a deterioration in fiscal prospects following an unexpected official move to expand welfare plans.

Over uncertainty on how President Jair Bolsonaro’s government would fund its new program ‘Renda Cidada,’ Brazilian markets took a hit. That’s without breaking the ‘spending ceiling’ rule that limits public spending growth to the rate of inflation.

Furthermore, in economic news, any trigger for higher interest rates would be linked to inflation, not a breach in the government’s spending cap rule. This was according to Brazil’s central bank president, Roberto Campos Neto. However, some economists remain unconvinced.

 

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