(Adds details, quotes from minutes)
By Jamie McGeever
BRASILIA, May 12 (Reuters) - Brazil’s central bank is nearing the limit of how low it is prepared to push interest rates to fight the economic impact of the coronavirus pandemic, according to minutes from its meeting last week, citing the risk of volatility in financial markets from further easing.
The minutes published on Tuesday detailed the discussion at the meeting of the bank’s rate-setting committee last week, when it cut the benchmark Selic rate by a larger-than-expected 75 basis points to a record low 3.00%.
The minutes show growing concern on the committee, known as Copom, with the potential for market instability if rates are cut much further, given the particularly elevated risk premium in Brazil due to its fiscal uncertainty and relative fragility.
“In this context, we would be close to a level where further reductions in the policy rate could be accompanied by instability in financial markets and asset prices,” the minutes said.
As a result, even though two members of the committee argued for even bolder action, policymakers “recognized the importance of gradualism in the conduct of monetary policy for assessing the response of financial asset prices.”
“The prevalent view was that, in light of the elevated uncertainty domestically, the remaining scope for monetary policy is unknown and may be small,” the minutes said.
Policymakers recognized that the economic contraction triggered by the coronavirus crisis will be “significantly deeper” than forecast at their previous meeting, and that the recovery from the third quarter onward will only be gradual.
According to the consensus view of economists in the central bank’s latest weekly ‘FOCUS’ survey, Latin America’s largest economy will shrink 4.1% this year. Anything more than 4.35% would be the biggest crash in at least 50 years, according to official figures.
Several global investment banks have revised their outlooks much lower in recent days, with Deutsche Bank, JP Morgan and Societe Generale now forecasting an economic contraction of 6.2%, 7.0% and 7.4%, respectively.
While Copom members agreed on the strong disinflationary pressures exerted by the crisis, the minutes show they also think inflation is on course to reach the central bank’s target over the next 18 months or so.
Inflation is currently well below target and the weekly ‘FOCUS’ surveys show that is expected to remain the case in 2020 and next year. (Reporting by Jamie McGeever, Editing by Louise Heavens and Paul Simao)