Brazilian central bank cuts rate again

Thursday, December 1, 2016

Brazil's central bank cut its key interest rate on Wednesday for the second straight month, as the country's recession deepened in Q3.

The Selic rate was slashed a quarter of a percentage point to 13.75% at the monetary policy committee's final meeting of the year. Last month, the Selic was lowered for the first time in three years, a 0.25 point cut to 14%.

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Even with the cuts, Brazil still leads the world with the highest central bank key rate adjusted for inflation, with 5.45%, followed by Russia with 3.68%, according to a study by Infinity Asset Management in November.

Inflation droppted to 7.87% in October from 8.48% in September, well above the central bank's target of 4.5%.

The November cut to 13.75% was expected by most analysts, who are now saying the statement from the central bank that accompanied the decision has left the door open for larger cuts in early 2017.

"The unanimous decision was followed by a slightly dovish communique, in Nomura's view, suggesting increased likelihood of an acceleration to 50bp in January," Nomura's Latin America strategist João Pedro Ribeiro said in a note. "Nomura continues to believe this is a long cutting cycle that will take the Selic rate to 10% by end-2017."

Capital Economics also noted that "the accompanying statement suggests that bigger cuts could soon be on the way."

It said that both domestic and external backdrops could change quickly, but that "there is enough here to suggest that a larger 50bp cut in the Selic could be on the table at Copom's next meeting in January."