UPDATE 2-Brazil cuts interest rates to new low, leaves door open for 'residual' easing

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By Jamie McGeever

BRASILIA, June 17 (Reuters) – Brazil’s central bank cut its benchmark interest rate by 75 basis points to a record low of 2.25% on Wednesday, as expected, and said there was some room left for further monetary stimulus to support an economy ravaged by the coronavirus pandemic.

With inflation running significantly below target this year and set to undershoot again next year, policymakers indicated the potential for further “residual” easing in coming months.

“The pace of cuts will slow, and many in the market will take ‘residual’ to mean 25 basis points. But I think it could be 50 basis points in August,” said Tatiana Pinheiro, chief economist at BNP Paribas Asset Management in Sao Paulo.

Brazilian interest rate futures market pricing on Wednesday indicated that another cut in the Selic rate to 2.00% by the end of the year was more likely than not.

Wednesday’s move was the second straight 75 basis point cut, and policymakers rowed back on their steer last month that 2.25% would be a floor. Forecasts indicate the Brazilian economy is heading for its steepest annual drop on record.

The bank’s rate-setting committee, known as Copom, said its decision was unanimous. A Reuters survey of 38 economists this month had predicted a rate cut of 75 basis points.

“The Copom believes that the current state of affairs continues to recommend an unusually strong monetary stimulus, but it recognizes that the remaining space for monetary policy stimulus is uncertain and should be small,” policymakers wrote in their decision.

“For the next meetings … any possible adjustment to the current monetary stimulus would be residual.”

Copom noted that various measures of underlying inflation are running below central bank targets, which are 4% this year and 3.75% next year.

Using forecasts based on a range of exchange rates and interest rate paths, Copom said inflation is pegged at 1.9% or 2.0% this year, and 3.2% or 3.0% next year.

Economic slack resulting from the COVID-19 crisis could sap demand and depress inflation even further, but loose fiscal policy, market worries over economic reforms and the effects of recent stimulus could all push inflation up, Copom said.

Most economists expect Latin America’s largest economy will suffer its worst annual downturn this year since records began in 1900. A Reuters poll and the central bank’s weekly survey of economists put the contraction at more than 6%.

Several global investment banks predict Brazil’s gross domestic product will shrink this year more than 7%. Last week, the World Bank revised its Brazil GDP forecast to an 8% drop.

Here is a link to the Copom statement:


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