May 1, 2020 / 3:53 PM / a month ago

Brazil central bank to cut rates again by 50 bps in May: Reuters poll

BUENOS AIRES (Reuters) - Brazil’s central bank will cut its benchmark interest rate by 50 basis points again on Wednesday to aid Latin America’s No. 1 economy as it plunges into a rapidly widening recession due to lockdown measures, a Reuters poll showed.

FILE PHOTO: A general view of Brazil's Central Bank during the coronavirus disease (COVID-19) outbreak in downtown Brasilia, Brazil, March 20, 2020. REUTERS/Adriano Machado

With activity already undergoing what appears to be the deepest quarterly slump on record and companies hardly able to sell their goods and services, inflation is no longer a threat that would prevent more monetary easing. [ECILT/LTAM]

The central bank’s policy committee, known as Copom, is set to extend the rate cutting cycle it opened last year to stoke an economy that was already lagging before the coronavirus pandemic, spoiling President Jair Bolsonaro’s vows for growth.

“The gravity of the situation has become more clear since the last meeting of the Copom,” said Etore Sanchez, chief economist of Ativa Investimentos in Sao Paulo. “The critical condition of the economy will prevail in policy decisions.”

In a sign of how fast economic conditions are declining, Brazil’s unemployment rate rose to 12.2% in the three months through March, marking the biggest increase in three years even though coronavirus was not the major factor.

The expected reduction would be the 7th since July, when the Selic rate stood at 6.50%, and leave it at a record low of 3.25% following a similar half-percentage point cut at a scheduled meeting in March, according to 26 economists polled April 27-30.

The Copom is then forecast to ease again to 3.00% at some point this quarter, below the 3.25% end-of-cycle rate expected in a previous Reuters poll in April, and remain there for a full year before gradually starting to tighten.

But this approach has caused a side-effect with a 27% crash of the real BRBY since January after the Copom’s rate cuts eroded the so-called “carry trade” advantage of the Brazilian currency, diminishing its attractiveness to investors.

Such a big depreciation would have ignited inflation in other circumstances, as in the 1980s or in present day Argentina, Brazil’s neighbor. However, the coronavirus-related contraction has left Brazilian firms without any pricing power.

“Despite the real’s weakness, inflation expectations have continued to fall, giving room for Brazil’s central bank to ease further,” Citi analysts wrote in a report this week. U.S. dollar sales also lessen pressures from a falling currency, it added.

Inflation will probably average 2.7% in the second quarter, its lowest for a three-month period since 2017, when a bumper crop brought down food prices, according to Reuters polls. Gross domestic product (GDP) is seen collapsing 5.7% in April-June.

The worrying outlook has led Congress to begin debating a bill to grant the central bank emergency powers to carry out “quantitative easing” or QE as part of its crisis-fighting arsenal.

So far, Roberto Campos Neto, the bank’s president, has ruled out widespread bond buying, saying any action would be similar to its foreign exchange intervention in times of acute market stress.

Officials want to allay fears they will embark on outright money printing. “It will be limited to the secondary market, we see this as a positive measure,” said Victor Beyruti, an economist at Guide Investimentos in Sao Paulo.

Reporting by Gabriel Burin; Editing by Nick Zieminski

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