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Brazil Central Bank Cuts Benchmark Rate to 2.25%, Leaves Door Open for More -- Update

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06/17/2020 | 04:11pm EDT

(Adds details and comments)

 

By Jeffrey T. Lewis and Paulo Trevisani

 

SAO PAULO--Brazil's central bank cut its benchmark Selic interest rate to a record low as the country's economy suffers a steep drop in activity amid measures to control the spread of the new coronavirus that shut down shops and factories for weeks.

The bank's monetary policy committee, or Copom, on Wednesday cut the Selic to 2.25%, from 3%. It was the eighth consecutive meeting with a rate cut, and the second time in a row the bank cut the Selic by 75 basis points.

The Copom said the rate cuts to date are "compatible" with the economic impact of the coronavirus pandemic and signaled it is open to more rate cuts at future meetings if necessary.

The committee "foresees that any possible adjustment to the current monetary stimulus would be residual," the statement announcing the cut said.

The Copom indicated after its February meeting that it planned to hold off on more rate cuts to evaluate the effect of a Selic rate at a then-record low of 4.25%. Since then, the bank has cut three more times, by a total of 2 percentage points, and more cuts could be in store as the policy committee tries to spur a recovery.

"The bank's message is that it couldn't say it wouldn't cut again. It needs to wait and see how big the coronavirus damage will be," said Andre Galhardo, chief economist at the Analise Economica Consultoria economic consultancy in Sao Paulo, adding he thinks there will be one more cut, of a half point.

Lower interest rates probably won't boost consumer spending much, according to Frederico Trajano, chief executive of retailer Magazine Luiza SA. The company closed all 1,100 of its shops toward the end of March, focusing instead on its thriving online business, and even now after the relaxation of social distancing in many areas of Brazil only about 600 of its stores are open.

"Businesses are going bankrupt, we're going through a brutal recession, so the Selic going to 2.25% from 3% won't make much of a difference" to consumers, he said. "But it will make it easier for companies to invest, with a lower cost of financing, and that will have a longer-term effect."

Brazil's economy has been slammed by the social-distancing measures that have shut down nonessential businesses and activities, with auto production alone plummeting 99% in April. Retail sales and service-sector activity both dropped the most in the same month since the indicators' series began, while unemployment moved higher.

The government stepped in to help by, among other things, approving payments of 600 reais ($114) a month to people working in the informal economy, such as house cleaners, delivery people and others. The amount is about 60% of the country's monthly minimum wage, and has helped millions of Brazilians scrape by.

But the government's capacity to help is constrained by its weak financial situation, and many of the aid programs have focused on loans to businesses rather than outright grants as tax revenue has dropped because of the pandemic. That puts more pressure on the central bank to take action, according to Pedro Paulo Silveira, chief economist at the Nova Futura brokerage in Sao Paulo.

"The fact is that the bank can't just do nothing. The government tried some stimulus by transferring money, those 600 reais, and via loans and other measures, but they have fiscal limits," he said. "The recovery, when it comes, is probably going to be slow, so the bank will have to step in with more cuts. My guess is the Selic could end up as low as 1.75%."

 

Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com

 

Stocks mentioned in the article
ChangeLast1st jan.
EURO / BRAZILIAN REAL (EUR/BRL) 0.24% 6.1263 Delayed Quote.33.62%
MAGAZINE LUIZA S.A. 0.40% 80.5 End-of-day quote.68.76%
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