(Adds analysts’ reaction)
By Jamie McGeever
BRASILIA, March 23 (Reuters) - The coronavirus pandemic will deliver a hefty demand shock to Brazil’s economy, central bank policy meeting minutes showed on Monday, potentially forcing policymakers to put aside their reservations about cutting interest rates again.
The minutes of the March 17-18 meeting of the rate-setting committee, known as Copom, showed that policymakers felt anything more than a 50 bps cut in the benchmark Selic rate to a record low of 3.75% could have been counterproductive and tightened financial conditions.
Copom said “caution” was required regarding future moves, and expressed concern over progress on economic reforms, the growing strain on public finances, and rising risk premiums in financial markets.
But Copom also said a high degree of “variance” of risks did not necessarily imply its next steps would be gradual. Rather, the size of future moves may be less certain.
“The minutes are more dovish than the policy statement,” said Alberto Ramos, head of Latin American research at Goldman Sachs. “Copom remains open to follow signals in the (economic) data and do more.”
Analysts at Citi also said the tone was dovish, noting that inflation pressures remained benign. They expect 50 basis point cuts at each of Copom’s next two meetings, taking the Selic rate down to 2.75%.
“Despite guiding for caution, the minutes show that the balance of risk has increased for Copom, and that the board has not closed the door to further cuts,” they said.
Copom stressed it would use all monetary, exchange rate and macroprudential tools in its arsenal to fight the crisis, but explained why its decisions would still be guided by “caution.”
“The possible interaction between the deteriorating global outlook and frustration regarding (domestic) reforms and fixing the public accounts may jeopardize the decline in structural interest rates seen in recent years,” the minutes said.
“In this light, the Committee considered that a reduction in the basic interest rate in excess of 0.50 percentage point could become counterproductive and result in tightening financial conditions,” they said.
Policymakers said the blow to Brazil’s economy from coronavirus will come via three main shocks: supply, inflation, and demand.
The first will likely be of little significance, and the second will likely be deflationary in the short term, given the sharp fall in commodity prices. The heaviest impact on monetary policy will come from the “significant” hit to demand, the minutes said.
Several economists now expect Brazil’s economy to shrink this year, with some predicting the biggest contraction in almost 60 years. (Reporting by Jamie McGeever Editing by Brad Haynes and Richard Chang)