Brazil Central Bank Keeps Selic Unmoved

Brazilian central bank keeps current key rate and warned of higher inflation. Read more here!

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Brazil’s central bank kept its key rate at an all-time low. However, it also warned of growing risks to inflation amid doubts over economic policy following presidential elections and global trade disputes.

The bank’s board, headed by its President Ilan Goldfajn, on Wednesday left the benchmark Selic unmoved at 6.50 percent, a stimulus it deemed necessary given the sluggish economy growth.

“The stimulus will begin to be removed gradually if the outlook for inflation at the relevant horizon for the conduct of monetary policy and/or its balance of risk worsen,” the central bank said in the statement that accompanied its decision.

In addition to the escalating trade war and worries over emerging markets, risks to structural reforms have also increased and affected investor expectations, the bank said. All of the market-friendly candidates are trailing by a wide margin in opinion polls ahead of October presidential elections.

A winner not committed to reforms would push “the currency to worsen, making the central bank raise the Selic earlier than expected,” said Newton Rosa, chief economist at Sul America Investimentos. “Perhaps even this year, after the election.”

Brazil’s currency has shed around 20 percent of its value this year. However, unlike central banks in Turkey or Russia that hiked interest rates following a sell-off in emerging markets, Goldfajn has so far stood pat.

The industrial, retail, and services sectors contracted recently, suggesting that demand has been soft ahead of contentious presidential elections, in which few candidates have presented convincing measures to discuss the country’s wide budget gap.

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During his tenure, Goldfajn has won investor praise for making central bank communication more transparent, taming inflation and taking the Selic to a record trough from 14.25 percent. He has become more careful in the past few months as policy makers weigh an increasingly feeble economy and below-target inflation on one hand and, on the other, a currency sell-off that could stoke price increases along the way.

Brazil’s economy is now expected to grow 1.4 percent in 2018, down from a 2.7 percent estimate at the beginning of the year, according to a central bank survey.

For the first time this year, the central bank included a question about the source of financial market uncertainty in a survey it sends to analysts ahead of each key rate decision. Particularly, it asked economists if they think recent volatility can be attributed more to international or domestic factors.

Meanwhile, the presidential race in the country is turning polarized between far-right lawmaker Jair Bolsonaro and Fernando Haddad, who is the chosen successor of leftist icon Luiz Inacio Lula da Silva.

While Haddad’s Workers’ Party has jittered investors with pledges to undo austerity measures, financial markets have slowly warmed up to Bolsonaro, whose top adviser supports free-market enterprise. If none of the candidates win more than 50 percent of the vote on October 7, there will be a run-off on October 28.

Despite the currency slump, Brazil’s consumer prices slipped in August amid a drop in food and transport costs. Analysts surveyed by the central bank see inflation at or below target through 2020.

If that outlook changes, the central bank indicated that it’s ready to act, said Isabela Guarino, who is an economist at XP Gestao de Recursos, a Sao Paulo-based fund manager.

“The highlight there is their indication that they could increase interest rates if the  balance of risks worsens,” said Guarino.

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