An emerging market rout has forced Brazil’s central bank to renege on its own guidance by cutting short its most aggressive easing cycle in a decade in a surprise decision.
Policy makers led by Ilan Goldfajn on Wednesday left the benchmark Selic rate unchanged at 6.50 percent, a move forecast by only two of 39 economists, with the remainder expecting a 13th straight cut. While price developments remain favorable and the outlook is in line with targets, there has been a change in the balance of risks to inflation, the bank board wrote in its statement.
“The global outlook has become more challenging and showed volatility,” the central bank wrote in a statement accompanying the announcement. “As a result, risk appetite towards emerging economies has diminished.”
The decision signaled Brazilian policy makers’ concern about emerging market volatility that has prompted central banks from Argentina to Indonesia to act. A sell-off that has wiped about 10 percent from the real since the last rate-setting meeting led to a rare about-face for the central bank, which had repeatedly indicated a final dose of monetary easing was in the pipeline.
“Risks intensified since the last monetary policy meeting,” David Beker, chief Brazil economist for Bank of America Merrill Lynch, said. “The global outlook became more challenging, and the central bank recognized this,” said Beker, one of the analysts who accurately forecast the rate decision.
Wednesday’s decision marks the end an easing cycle that began in October 2016 and shaved 775 basis points off borrowing costs.
“Regarding the next meetings, the Committee deems appropriate to maintain its policy rate at its current level. The Copom emphasizes that the next steps in the conduct of monetary policy will continue to depend on the evolution of economic activity, the balance of risks, and on inflation projections and expectations,” policy makers wrote.
Economists polled weekly by the central bank still see inflation below target for 2018 and 2019. Yet the real’s fast decline to a two-year low has bolstered the argument that the currency weakness, if prolonged, may contaminate prices by making imports more expensive, for example.
Uncertainty whether Brazil’s next president will continue with business-friendly measures has further compounded investor concerns. A poll on this October’s elections released on Monday showed market-favorite candidate Geraldo Alckmin losing ground while support rose for leftist former minister Ciro Gomes, who has advocated for the expropriation of oil fields.