The second straight cut in the monetary policy rate (by 50bp to 5.5%) by Banco do Brasil (BCB, Brazil’s central bank) can be interpreted as an attempt to ignite a cyclical boost amid structural impediments to economic growth. In other words, after having been cautious for a year, recognizing domestic and external risks to the inflation outlook, the BCB has adopted a dovish stance. The monetary policy committee (Copom) acknowledged “the consolidation of the benign scenario for prospective inflation should permit additional adjustment of the degree of stimulus,” which opens the door for one or two more rate cuts this year. Such rate cuts should have the desired stimulus effect only after policy risk dissipates and business confidence is partially restored, notably when the pension reform is voted in the Senate next month. Yet the BCB remains cautious, stating that “the outlook remains uncertain, however, and risks of a more pronounced slowdown in global growth persist.”
