Dec 12, 2017
Central Bank Drops Brazil's Prime Rate to Historic Low of 7.0%
Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.
The Central Bank of Brazil last week reduced the prime interest rate 0.5% to 7.0%, which is the lowest rate on record. They also indicated that the rate might decline a little more in their February meeting.
Further reduction in the prime rate will probably depend on pension reform measures currently being debated in the Brazilian Congress. The final outcome of the debate is uncertain, but reforming the nation's pension system is considered essential for getting Brazil's financial house in order.
The prior record low for the prime rate was 7.25% set in October of 2012 when Dilma Rousseff was president. Even with the reduction of the prime rate to a historical low, the interest rates in Brazil are still some of the highest in the world among developed economies trailing only Turkey, Russia, and neighboring Argentina
Most economists feel the rate will decline 0.25% next February to 6.75%, but after that it is an open question what will happen.
The Central Bank adjusted downward its estimate of inflation for 2017 to 2.9% compared to their estimate of 3.3% in October. Food and beverage led consumer prices lower. Some staple such as rice, beans, and sugar are as much as 40% lower compared to a year earlier. The Central Bank is forecasting inflation for 2018 and 2019 at 4.2%. During the 12 months prior to November, the Central Bank estimated inflation at 2.77%. If inflation continues to be held in check, it is possible the Central Bank could lower the prime rate to below 6.75%.
The market consensus is that inflation will be 2.03% in 2017, 4.02% in 2018, and 4.25% in 2019. The market also expects the prime rate to be back up to 8% by the end of 2019.