Brazil Keeps Rate at Record Low But Cautions of Higher Risks

(Bloomberg) — Brazil’s central bank kept its key rate at an all-time low but cautioned of growing risks to inflation amid doubts over economic policy following presidential elections and global trade disputes.

The bank’s board, led by its President Ilan Goldfajn, on Wednesday left the benchmark Selic unchanged at 6.50 percent, a stimulus it considered necessary given weak economic growth.

“This 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 risks worsen,” the central bank said in the statement accompanying its decisionIn addition to the burgeoning global trade war and concerns over emerging markets, risks to structural reforms have also increased and affect 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 cause “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 lost roughly 20 percent of its value this year. Yet unlike central banks in Turkey or Russia that hiked interest rates following a selloff in emerging markets, Goldfajn has so far stood pat.

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

During his tenure, Goldfajn has won investor praise for making central bank communication more transparent, taming inflation and taking the Selic to a record low from 14.25 percent. He has become more cautious in recent 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 down the road.

Brazil’s economy is now expected to grow 1.4 percent in 2018, down from a 2.7 percent estimate at the start 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 turbulence in a survey it sends to analysts before each key rate decision. Specifically, it asked economists if they think recent volatility can be attributed more to international or domestic factors.

Tumultuous Elections

Brazil’s presidential race is becoming increasingly polarized between far-right lawmaker Jair Bolsonaro and Fernando Haddad, the chosen successor of leftist icon Luiz Inacio Lula da Silva. While Haddad’s Workers’ Party has spooked investors with pledges to undo austerity measures, financial markets have slowly warmed up to Bolsonaro, whose top adviser advocates free-market enterprise. If no candidate wins more than 50 percent of the vote on Oct. 7, there will be a run-off on Oct 28.

In spite of the currency depreciation, Brazil’s consumer prices fell 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 signaled its poised to act, said Isabela Guarino, an economist at XP Gestao de Recursos, a Sao Paulo-based fund manager.

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

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Source: Investing.com