Brazil Kickstarts 2017 With Surprise of Aggressive Rate Cut 2

Selic rate slashed

Brazil’s central bank started 2017 off with a literal bang as it effected a sharp cut to its key Selic rate. The Selic was slashed by a sharper-than-expected 75 basis points to 13% on January 11. The vote by members of the central bank’s rate setting committee, or Copom, was unanimous.

Most analysts surveyed by Reuters and 9 out of 12 economists surveyed by the Wall Street Journal had expected a more moderate 50 basis point cut. Only a handful had predicted the 75 basis point cut which was eventually effected last week. At 13%, the Selic rate is close to a two year low.

With the rate cut in January, the central bank has extended its rate cutting cycle to three meetings. It had cut the Selic by 25 basis points in each meeting in October and November 2016.

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Economic outlook

The central bank appears to remain relatively unenthusiastic about the economy. It noted that since the Copom’s last meeting, economic activity was weaker than anticipated judging by leading indicators.

It also stated that Brazil’s economic recovery could be delayed further and could be slower than initially forecasted.

However, one aspect worthy of note was that the central bank did not place as much emphasis on external economic conditions as it had in previous meetings. This is especially important in light of its references to the US and the change of political guard there.

Unlike Mexico (EWW), Brazil is not as dependent on the US for trade. According to World’s Top Exports, while 81% of all Mexican exports landed in the US in 2015, only 12% of Brazil’s exports were shipped to Uncle Sam in the same year. China was Brazil’s top export destination, with 18% of its total exports by value shipped to the Asian giant.

Coming back to Brazil, the primary reason for the aggressive easing by the Banco Central do Brasil was the fall in inflation. Let’s look at the reasons why this happened in the next article.

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