Brazil to end rate cuts

Brasilia: Brazil’s central bank on Thursday forecast the economy will speed up in the second half of the year while prices remain under control, hinting its aggressive rate-cutting cycle might be closer to an end but leaving the door open for more easing if needed.

In minutes of its latest rate-setting meeting, the bank’s monetary policy committee, or Copom, repeated that any further easing should be done “sparingly,” but gave no clear guidance on its next steps.

The minutes were almost identical in language to those of its previous meeting in May, but introduced a few hawkish twists that left investors wondering whether the central bank will end its monetary easing campaign in August or October.

“We maintain our forecast of a final rate cut of 50 basis points to 7.5 per cent in August. Options remain open, and another rate cut cannot be ruled out at the following meeting, in October,” Marcelo Carvalho, economist with BNP Paribas, said in a note.

The central bank cut its benchmark Selic rate for the eighth straight time to an all-time low of 8 per cent on July 11 as policymakers scramble to revive Latin America’s largest economy.

Under the leadership of Alexandre Tombini, the bank has slashed 450 basis points off the Selic since August to help shield the world’s No 6 economy from the fallout of a debt crisis in Europe.

Most in the market are expecting the bank to end its rate-cutting cycle in August with another 50-basis-point cut to bring rates to 7.50 per cent, and Brazil’s interest rate futures fell on Thursday, reflecting that expectation. The bank’s following rate-setting meeting is scheduled for October 10.

Economists say the aggressive easing cycle will make it more difficult for the central bank to control inflation next year.

However, the slow pace of recovery in the Brazilian economy, which has practically stalled since mid-2011, is leading some analysts to believe that the easing cycle could be extended to help a beleaguered industrial sector.

In a bid to prevent the economy from falling into recession, President Dilma Rousseff has announced a flurry of stimulus measures such as industry-specific tax cuts and subsidised loans.

Still, the domestic economy has reacted slowly to the stimuli as business confidence continues to fall due to lingering debt woes in Europe.

A surprise drop in retail sales in May set off alarm bells, with analysts warning that the industry crisis could start to contaminate the stalwart of the Brazilian economy: consumer demand.

Market analysts have slashed their forecast for economic growth in Brazil to below 2 per cent this year, in what would mark a sharp slowdown from the red-hot 7.5 per cent expansion seen only two years ago.

Policymakers have warned that private economists may be getting ahead of themselves with overly pessimistic forecasts.

‘Splitting hairs’

The central bank acknowledged in the minutes that the recovery has been very gradual, but said that the pace of economic activity will be “more intense” this semester.

For the first time the bank also said it saw a reduction in the possibility of “extreme events” in global financial markets, hinting at a somewhat more favourable view despite the slowdown.

By removing the doomsday scenario of a global financial collapse from its playbook, the bank is reaffirming market views that the rate-cutting cycle is near its end, some analysts say.

However, the lack of clear guidance is making predictions more difficult.

“We are splitting hairs here, the minutes are almost identical to the last one,” said Alberto Ramos, chief Latin America economist for Goldman Sachs. “The central bank is leaving its options wide open.”

Lower inflation as well as disappointing economic data has allowed the Brazilian central bank to cut rates faster than banks of other emerging-market nations such as China and Russia.

Brazil’s inflation fell to its slowest pace in almost two years in June on the back of temporary tax breaks for autos and a decline in electricity and fuel costs. The annual inflation rate has eased to 4.92 per cent, moving closer to the center of the official target range of 4.5 per cent, plus or minus two percentage points.