Copom lowers rate to 3% and indicates another cut
The Monetary Policy Committee (Copom) made a bigger-than-expected cut in the Selic benchmark interest rate, of 75 basis points, taking it to an all-time-low 3%. It also indicated that it could make another cut of the same size in the next meeting, in June. Its members were divided, with two advocating an even bigger immediate cut, but the view that a smaller cut would be more appropriate, because of domestic fiscal uncertainties, prevailed.
"Taking into account the baseline scenario, the balance of risks, and the broad array of available information, the Copom unanimously decided to lower the Selic rate to 3.00%," the committee said in the statement. "For the next meeting, conditional on the fiscal scenario and on the economic data, the Committee considers a final monetary adjustment, not larger than this one, to complete the change to the policy rate that it deems adequate to counteract the economic consequences from the covid-19 pandemic."
Yet the Central Bank's committee highlighted that the balance of risks has "a higher-than-usual variance." That is, the high uncertainties can change the scenario for inflation and interest rates. Because of this, it said that "further information on the effects of the pandemic in the economy, as well as a decline in fiscal uncertainty, will be essential to determine its next steps."
For the monetary authority, the severity of the crisis prescribes an "unusually large monetary stimulus," even though a possible deterioration of the fiscal situation may limit the size of the new cut. "The fiscal trajectory over the next year, as well as the perception of its sustainability, will be crucial to determine the length of the stimulus."
Two of the eight members who participated in the meeting said it could be timely to make the cuts of Tuesday's meeting and of the next at once. "Even with the possibility of an increase in the structural rate [which allows maximum activity growth without generating inflationary pressures], it could be appropriate to provide the overall monetary stimulus immediately, in combination with a guidance of keeping the interest rate constant for the next months," it said.
These members said this early stimulus would be adequate to "reduce the probability of missing the inflation target for 2021." The more cautious group, which emphasizes the fiscal risks, came out the winner of the debates in the committee.
But is the additional cut in June...
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