Brazil keeps interest rate at 6.5 pct in surprise move

Brazil's Central Bank ended a run of 12 consecutive interest rate cuts, maintaining the key Selic rate at 6.5 per cent today in a decision that surprised the market.

Analysts had broadly expected one more cut to 6.25 per cent. The decision reflected what the bank's committee said was "volatility" at a time of weak recovery from Brazil's worst recession on record.

The Central Bank has mounted a sustained campaign to breathe life into the moribund economy, slashing the Selic all the way from 14.25 per cent in October 2016, a time when the country faced not only negative economic growth but high inflation.

 

Analysts said the currently rock-bottom inflation -- 2.76 per cent in April, which is well below the official three percent target -- would have given the bank a chance to lower rates one more time.

The Fiesp and Ciesp, two industrial federations in the economic center of Sao Paulo, criticized the Central Bank's caution.

"Maintaining the Selic will delay even more the reduction in the cost of credit. We see a risk of the economic recovery dying just when Brazil was trying to get out of its worst crisis," they said in a statement.

"Growth is still very fragile... (and) expensive credit works against the country." But analysts were factoring in the near certainty that the bank would pause cuts at the next meeting, even if not at this one, due to potential new inflationary threats.

These include possible rate hikes in the United States, the increase in oil prices and devaluation of the national currency, the real, analysts say. The real has lost 10 per cent of its value against the dollar since January.

Another factor spooking the bank is the absence so far of a strongly pro-markets presidential candidate in elections due in October and the stalling of current President Michel Temer's austerity reforms.

In a statement, the bank's monetary policy committee referred to dashed "expectations for continuity in reforms and the adjustments needed for Brazil's economy." That "raises the trajectory for inflation," it said.

After two years of recession, Brazil returned to economic growth in 2017, with gross domestic product expanding by a meager one per cent.

However, the recovery has been slow and uneven. While the government expects three per cent GDP growth this year, market forecasts have fallen to 2.51 per cent, the weekly Central Bank survey shows.

Unemployment remains stubbornly high at 13.1 per cent. President Michel Temer on Tuesday declared that Brazil was in good economic health again.