31/07/19 | FLASHGustavo Arruda, Senior Economist | BNP Paribas do Brasil SA Brazil: Monetary policy decision – cut, cut, cutKEY MESSAGES Brazil’s central bank (BCB) on Wednesday cut the Selic rate to 6.0%, opening the room for 5.0% Selic rate already in October. We read the accompanying policy statement as dovish, suggesting 50bp as the cruise pace. According to the statement, the BCB could reassess the scenario in case of negative developments on the economic front. The Brazilian central bank (BCB) on Wednesday cut the Selic rate by 50bp to 6.0%, against our call of 6.25%. In the post-meeting statement, the BCB maintained a dovish tone, keeping the door open for 50bp cuts in September and October. Despite the aggressive move, the BCB has upgraded its view on economic activity to “possibility of recovery” from “interruption in the recovery” in June. According to the statement, the mild inflation scenario should allow the BCB to add more stimuli. On global risks, the committee now sees the global outlook as “benign”, considering the change in the prospects for monetary policy in advanced economies. At the same time, the committee continues to see “risks associated with a slowdown in global growth”. In other words, the statement continues to consider the global environment as disinflationary. The inflation projections reinforce the scenario for additional interest rate cuts. Under the current consensus assumptions for Selic (5.50% end-2019 and 5.50% end-2020) and USDBRL at about 3.75 by end-2019 and 3.80 by end-2020, inflation at the end of 2020 is projected to be 3.9% – below the 4.0% target. In an alternative scenario, where the Selic rate and USDBRL are flat at 6.5% and BRL3.75, respectively, inflation would end 2020 at 3.6%. With regard to the balance of risks to inflation, the statement reiterated that the “balance of risk to inflation have evolved favourably”. Besides this more dovish comment, the central bank affirmed that uncertainties around the reforms agenda “still prevail”. In other words, the easing cycle will continue to follow the evolution of the reforms’ agenda in Congress. Despite our previous thinking that the combination of the below-target inflation projection for end-2020 and the disappointing growth, could justify a cut back in June, the size of today’s cut surprised us. Considering the balance of risks, we expected the BCB to prefer to stay on the conservative side by cutting less and at a smaller pace, rather than run the risk of having to hike rates soon. With the BCB having revealed its dovish preference, we think it will continue its easing cycle at a 50bp pace. Our scenario now projects 50bp cuts in September and October, with the Selic rate finishing 2019 at 5.00%. For 2020, we expect the central bank to start a hiking cycle in Q4 2020, with risk of having to hike early in response to inflation dynamics. The upcoming meeting minutes (to be released on 6 August) will give the BCB the opportunity to clarify its view on monetary policy going forward. . Fig. 1: Selic (%, a.r.) Sources: BCB, BNP Paribas MARKET ECONOMICS | EM ECONOMICSFLASH | EM31 July 2019 Please refer to important information and MAR disclosures at the end of this report1 LEGAL NOTICE This document has been written by our Strategist and Economist teams within the BNP Paribas group of companies (collectively “BNPP”); it does not purport to be an exhaustive analysis, and may be subject to conflicts of interest resulting from their interaction with sales and trading which could affect the objectivity of this report. This document is non-independent research for the purpose of the UK Financial Conduct Authority rules. For the purposes of the recast Markets in Financial Instruments Directive (2014/65/EU) (MiFID II), non-independent research constitutes a marketing communication. 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