March 23, 2020 / 12:20 PM / 18 days ago

UPDATE 1-Brazil central bank minutes show caution despite coronavirus

(Adds detail, quotes)

By Jamie McGeever

BRASILIA, March 23 (Reuters) - The coronavirus pandemic will deliver a hefty demand shock to Brazil's economy, but worries over economic reforms and rising risk premia limited the central bank's interest rate cut last week to 50 basis points, meeting minutes showed on Monday.

The minutes of the March 17-18 meeting of the rate-setting committee, known as Copom, also showed that policymakers felt anything other than a 50 bps cut in the benchmark Selic rate to a record low of 3.75% could have been counterproductive and led to an unwanted tightening of financial conditions.

Looking ahead, policymakers said that the "variance" of risks is greater and that more economic information and data are "essential" to determining the committee's next steps.

Although many economists see recession ahead and Copom stressed it was ready to use all monetary, exchange rate and macroprudential tools in its arsenal to fight the crisis, the committee said "caution" will still guide their thinking.

The minutes showed that concern over progress on economic reforms, growing strain on public finances and rising risk premia in financial markets kept Copom from delivering a more aggressive rate cut last week.

A bigger rate cut could have resulted in an unwanted tightening of financial conditions, policymakers said in the minutes.

"The possible interaction between the deteriorating global outlook and frustration regarding (domestic) reforms and fixing the public accounts may jeopardize the decline in structural interest rates seen in recent years," the minutes said.

"In this light, the Committee considered that a reduction in the basic interest rate in excess of 0.50 percentage point could become counterproductive and result in tightening financial conditions," they said.

Policymakers said the blow to economic activity in Brazil from coronavirus will come via three main shocks: supply, cost of production, and demand.

The first shock will likely be of "little quantitative importance", the minutes said, and the second will likely be deflationary in the short term, given the sharp fall in commodity prices.

The heaviest impact on monetary policy will come from the "significant" hit to demand, indicating pressure to lower borrowing costs further. (Reporting by Jamie McGeever Editing by Brad Haynes)

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below