March 18, 2020 / 9:44 PM / 11 days ago

UPDATE 3-Brazil cuts rates, pledges full arsenal in coronavirus fight

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By Jamie McGeever

BRASILIA, March 18 (Reuters) - Brazil’s central bank on Wednesday cut its benchmark interest rate by 50 basis points to a record-low 3.75% to cushion the economic blow of the coronavirus pandemic, but signaled no rush to cut again and emphasized the need for more economic reforms.

The decision by the bank’s nine-person rate-setting committee, known as “Copom”, was unanimous and comes as more economists are predicting recession this year. Brazil’s main stock index has plunged 35% this month alone and the currency has sunk to new lows well below 5.00 per dollar.

In their decision, policymakers flagged the global slowdown triggered by the new coronavirus, which they said had still not appeared in Brazilian economic data.

The central bank “will continue to deploy its arsenal of monetary, exchange rate and financial stability policies to fight the current crisis,” Copom said in their statement.

The central bank has ramped up its foreign exchange interventions lately and, in conjunction with the Treasury, has pledged to wade into the bond market to provide liquidity.

Economists said Copom trod a fine line between acting to fight the mushrooming crisis, and not going too far for fear of weakening the currency even further and fueling inflation expectations and risk premia.

“They tried not to create any more market instability than there already is,” said Julia Braga, associate professor of economics at Universidade Federal Fluminense in the state of Rio de Janeiro. “They struck a good balance.”

Underscoring how much and how quickly the economic outlook has deteriorated, Goldman Sachs and JP Morgan said on Wednesday they expect Brazil’s economy to shrink by 0.9% and 1.0% this year, respectively.

Jose Francisco Goncalves, chief economist at Banco Fator in Sao Paulo, was even more bearish, penciling in a contraction of up to 3.5%.

“The central bank is behind the curve, and will have to cut rates again. If you have an interest rate of 3.75% and inflation at 3.5%, you have a positive interest rate. When activity is falling this quickly, that is bad - really bad,” he said.

In its statement, the central bank said that its “hybrid” forecasting model with a constant exchange rate of 4.75 reais per dollar, inflation would be 3.0% this year and 3.6% the next.

Its official targets are 4.00% this year and 3.75% next.

Policymakers also warned, however, that any doubts about the government’s economic reform agenda could push up risk premia.

“Under such circumstances, additional monetary easing may be counterproductive and result in a tightening of financial conditions,” they said. (Reporting by Jamie McGeever Editing by Brad Haynes and Diane Craft)

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