Politics

Coronavirus fears have created a dilemma for Brazil’s Central Bank

The Central Bank said it would stop reducing Brazil's already low benchmark interest rates, but outside pressure could cause them to go back on their promise

Coronavirus fears have created a dilemma for Brazil’s Central Bank
Photo: EBC

After the U.S. Federal Reserve slashed interest rates by 0.5 percentage points to mitigate the impacts of the coronavirus outbreak on the U.S. economy, investors immediately predicted a similar move by Brazil’s Central Bank. On March 18, when both the Fed and Brazil’s Monetary Policy Committee are set to have policy meetings, the expectation of further interest rate cuts is already dictating stock prices—but economists are unsure whether more cuts will have much of an effect on the Brazilian economy at this point.

The night after the Fed’s first emergency decision since the 2008 financial crisis, investors’ bets were strengthened by a statement from the Central Bank, saying it is “closely monitoring” the impacts of the coronavirus on finances and the Brazilian economy. It added that “the impact of the global slowdown on the Brazilian economy tends to dominate an eventual deterioration in financial assets’ prices,” but that the next two weeks will provide data on how this may affect inflation, and consequently, monetary policy.

For investors, that sounded like an “open door for more stimulus packages to come,” as Itaú BBA’s research team wrote to its clients. If this forecast does come to pass, it would mark a change from the committee’s recent decision to halt the monetary easing cycle that has brought...

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