By Jamie McGeever
BRASILIA, Sept 24 (Reuters) - Gradual economic growth and persistently low inflation in Brazil are likely to pave the way for a further reduction in interest rates, the country’s central bank indicated on Tuesday, warning that global economic conditions appear to be deteriorating.
Inflation, already well below the central bank’s target, is expected to ease further in the coming months before recovering, while growth in the third quarter is expected to slow from the second, according to minutes of the bank’s rate-setting committee, known as Copom.
The minutes are from Copom’s Sept. 17-18 meeting when it cut the benchmark Selic rate by half a percentage point to a fresh record low of 5.50%.
“After higher-than-expected growth in the second quarter, the Committee expects gross domestic product (GDP) to grow slightly in the third quarter,” the minutes said, referring to the 0.4% pace of expansion in the April-June period.
“The Committee deems that the consolidation of the benign scenario for prospective inflation should permit additional adjustment of the degree of stimulus,” the minutes said.
Inflation in August was 3.43%, well below the central bank’s year-end target of 4.25%. Assuming various market-based projected paths for interest and exchange rates over the next 12 months, inflation next year could be around 3.6% to 3.8%, the minutes said.
The central bank’s official 2020 inflation target is 4.00%.
The minutes were in line with Copom’s statement last week, economists said, and are likely to reinforce the view of those who believe the Selic is headed below 5.00%.
“The post-meeting policy statement and the minutes read as dovish,” said Alberto Ramos, head of Latina American research at Goldman Sachs in New York. “Copom preserved the easing-bias guidance.”
Market-based interest rate futures point to an additional 65 basis points or so of easing by the middle of next year. Many economists, like those at BNP Paribas, Bank of America Merrill Lynch and Santander, think the Selic will go even lower.
“We reiterate our view that the Selic will close 2019 at 4.5% and stay there through the end of 2020,” analysts at XP Investimentos wrote in a client note.
Policymakers said financial conditions are “favorable” despite some recent volatility, thanks to looser monetary policy costs at home and abroad, a “relatively favorable external environment for emerging economies” and improving domestic economic fundamentals thanks to the government’s reform agenda.
But the international outlook remains uncertain and the likelihood of a more pronounced slowdown in global growth persists, the minutes said. This is fostering an increasingly risky outlook for risky assets. (Reporting by Jamie McGeever Editing by Chizu Nomiyama)