Despite risk of recession, interest rates should hold
At 6 pm today, the Central Bank’s Monetary Council will announce Brazil’s benchmark interest rates for the next 45 days. Despite the risk of recession (that is, two straight quarters with negative growth), the bank is not expected to lower rates—a common strategy to foster investments. According to Itaú Unibanco, the Central Bank won’t change the Selic rate until there is “more clarity around the economic reforms—especially the pension reform.”
Nevertheless, a downward bias is building rapidly. The Brazilian economy remains sluggish, with investments at a worrisomely low level. The country’s GDP shrank in the January-March period (the first contraction since 2016). And indicators for May and April give little hope that the trend could be reversed in the short term.
In the end, the committee’s debate will center on how serious policymakers think the slowdown is—and how confident they feel that inflation has reached its upper limit. Unlike its international counterparts which are often concerned with economic growth, Brazil’s Central Bank’s mission is to keep inflation rates within the target band set by the government. Back in May, the bank’s president, Roberto Campos Neto,...