Brazil Central Bank to Detail Easing Plans: Decision Day Guide

(Bloomberg) --

Brazil's central bank is widely expected to lower interest rates for the first time in over a year on Wednesday. The question is the magnitude of the cut, and how long and deep its easing cycle will be.

While 18 economists surveyed by Bloomberg expect policy makers to start with a half-point cut to the benchmark Selic, 25 foresee a more cautious approach with a quarter-point reduction. Two even say the rate will remain at its current record low of 6.5%. It's the first time in nearly three years that investors show such a degree of disagreement about the outcome of a monetary policy meeting in Brazil.

Going forward, Bank of America Merrill Lynch sees borrowing costs falling to 4.75% this year, well below the 5.50% estimated by many other institutions including Goldman Sachs.

Brazil's central bank, led by Roberto Campos Neto, is poised to inject more stimulus into an economy that's flirting with recession and going through a prolonged period of below-target inflation. Prospects for easing got a significant boost this month when the lower house of Congress backed a pension reform proposal the bank's board has deemed crucial to the stability of prices.

Read More: Brazil's Double-Digit Unemployment Poised to Undermine Rate Cut

Latin America's largest economy is poised to join emerging market peers from South Africa to Indonesia that have cut rates to buoy growth. Brazil's decision will come a few hours after that of the U.S. Federal Reserve, which reduced interest rates by a quarter point.

What Our Economist Says

“We forecast a 25bps cut at this meeting, but in truth anything could happen. Past isn't any guide this time, because we have never been under this particular set of circumstances: below-target inflation (current and projected), ample idle capacity, the world on an easing mode, and the Selic already at a low starting point. Cutting 25bps now and proceeding gradually with the adjustment has the advantage of leaving some room to adapt to changes in the local or external backdrop. Cutting 50bps (or more) could fuel bets of a more aggressive easing cycle, unless the BCB signals otherwise in the statement.”

--Adriana Dupita, Latin America economist at Bloomberg Economics

Wednesday's decision will be published on the central bank's website after 6:00 p.m. local time in Brasilia together with a statement from the institution's board.

Here's what to watch out for:

Balance of Risks

The central bank had been emphatic in stating that uncertainties surrounding economic reforms including a pension overhaul were the main obstacle to lower borrowing costs. More specifically, failure to approve the pension bill that seeks to save billions of dollars would prompt risk premium and inflation to spike. Now that the long-sought legislation is advancing in Congress, investors will be scouring the bank's statement for insight on what it means for the future path of monetary policy. A greater emphasis on downside risks to consumer prices would pave the way for more interest rate cuts.

Inflation

Investors will be looking closely at the central bank's latest inflation forecasts for 2020 and 2021 that incorporate exchange rate and borrowing cost estimates from its weekly economist survey. Policy makers have said that many gauges of consumer prices are at comfortable levels, and that the outlook for inflation as a whole is benign. Brazil targets inflation of 4% in 2020 and 3.75% in 2021.

Economic Recovery

Policy makers have said that Brazil's recovery has been interrupted, and that the economy may not grow in the second quarter following a contraction in the first three months of the year. Financial markets will be watching for stronger warnings about the state of economy going forward -- both domestically and globally. In that sense, board members may highlight the fact that central banks around the world are easing in the face of more feeble activity. “It's important if the central bank signals it's concerned about growth in 2020,” said Mauricio Oreng, senior Brazil strategist at Rabobank. “If there's an outlook with downside risks for activity, it makes sense to inject stimulus as soon as possible.”

To contact the reporter on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net

To contact the editors responsible for this story: Walter Brandimarte at wbrandimarte@bloomberg.net, ;Juan Pablo Spinetto at jspinetto@bloomberg.net, Matthew Malinowski

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