Brazil’s central bank will keep its benchmark interest rate anchored at a record low later this week, and probably keep it there for the rest of this year, according to a Reuters poll of economists.
The central bank’s policy-setting committee (Copom) has held its Selic interest rate at 6.50 percent since March last year, and is likely to remain patient for several more months while it assesses the economic and political outlook.
The focus may even be shifting, however slowly, to whether the central bank’s next move might be a rate cut rather than a hike.
Growth in Brazil remains sluggish after a deep recession, and inflation remains well-contained even though interest rates have never been lower. Brazil’s currency has also firmed slightly, keeping growth in check and capping import prices.
All 28 economists polled by Reuters expect the central bank to keep its key rate unchanged on Wednesday for the seventh straight meeting. Of the 22 who responded to the question how rates would skew for the rest of the year, 12 said ‘no change’, eight said ‘higher’ and two said ‘lower’.
That is more dovish than a Reuters poll in December, when more than two thirds of respondents said Copom would begin raising rates in the second half of 2019. Now, just over one third say the risk for rates this year is higher.
“The skew is still tilted to the upside, but increasingly less so. Rates on hold for the full year would definitely be the baseline if social security reform is approved,” said Alberto Ramos, Managing Director and Head of Latin American Economic Research at Goldman Sachs in New York.
“Positive news will likely lead to currency appreciation, and that will turn the inflation outlook even more benign in the short term,” Ramos said.
While a dovish turn from the U.S. Federal Reserve in recent weeks has brightened the outlook for emerging economies and their financial markets, the biggest single domestic factor determining Brazil’s economic path this year is pension reform.
Economists are increasingly hopeful that President Jair Bolsonaro’s plans, which could save up to 1.3 trillion reais ($350 billion) over the next 10 years, will get through Congress soon. This will help balance Brazil’s books, inject a huge dose of investor confidence into the economy and put the national currency, the Brazilian real, on an even stronger footing.
“If a good package of social security reform measures is passed, and the external environment is favorable, there could even be a small cut in interest rates this year,” said Sergio Vale, chief economist at MB Associados.
Financial markets have already moved in that direction. On the eve of Copom’s last rate decision in December, interest rate futures were pricing in around 20 basis points of tightening by the end of 2019. Now they are pricing in around 20 basis points of easing.
Wednesday’s Copom decision will be the last presided over by central bank governor Ilan Goldfajn, who is set to be replaced next month by Roberto Campos Neto, a senior executive at Banco Santander Brasil SA.
In an interview with Reuters last month, Goldfajn echoed the Copom’s statement from December and said policy is stimulative. “Whether it is sufficiently so, we will always look at the right moment,” Goldfajn said, stressing, however, that this did not indicate any shift in stance.