February 11, 2020 / 12:56 PM / 14 days ago

UPDATE 2-Brazil central bank assessing increased 'power' of recent rate cuts - minutes

(Adds reaction, detail)

By Jamie McGeever

BRASILIA, Feb 11 (Reuters) - The economic and financial impact of Brazil's recent interest rate cuts may be greater than in previous periods, minutes of the central bank's last policy meeting showed on Tuesday, thereby justifying a pause in its unprecedented easing cycle.

On balance, the minutes showed policymakers believe there may be less slack in the economy than previously thought, and that more flexible credit and capital markets have magnified the power of monetary policy.

The minutes of the Feb. 4-5 meeting of the bank's rate-setting committee, known as 'Copom,' laid out in more detail the thinking behind the "interruption" to the easing cycle after Copom lowered the benchmark Selic rate to a new low of 4.25% last week.

Jason Vieira, chief economist at Infinity Asset Management in Sao Paulo, said the most notable points were policymakers' recognition that the stimulative effects of previous easing have yet to be felt on the economy, and that the transmission of monetary policy to borrowers now is greater than it was before.

"The door to further rate cuts is closed until further notice," Vieira said. "They are now emphasizing that changes in financial intermediation, credit and capital markets will have an effect, and no longer 'should' have an effect."

The minutes cited "multiple uncertainties" surrounding the current degree of slack in the economy, the pace of the recovery, and the increasing potency of monetary policy as reasons to pause.

"The Committee considers that a better understanding of these effects is essential to determine the next monetary policy steps," the minutes said.

There was some division between Copom members over the degree of slack in the economy, which they had previously said was high, and a major reason for inflation consistently running below target.

Some maintained that persistently low inflation points to a large amount of unused capacity, but others said the 2015-16 recession may have damaged the supply side of the economy. This is reflected in a "dichotomy" between a recovering labor market and surprisingly weak industrial production and investment.

"The dichotomy of the latest data suggests that there may be less slack in the economy than measured by traditional methods," the minutes said.

Policymakers also discussed the potential impact of the coronavirus outbreak that originated in China. Any action from Copom would depend on the scale of the global economic slowdown versus the reaction of asset prices, the minutes said. (Reporting by Jamie McGeever Editing by Brad Haynes and Bernadette Baum)

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