Fed cuts interest rates and Covid-19 may lead Brazilian Central Bank to rethink monetary policy and cut interest rates again in Brazil

The Federal Reserve's (Fed) decision to cut interest rates led the Brazilian Central Bank to practically discard the minutes of the institution's last meeting of the Monetary Policy Committee (Copom). In it, the Brazilian Central Bank indicated the end of the process of cutting the basic interest rate (Selic), which currently stands at 4.25% per year, the lowest level in the country's history.

Yesterday, the Brazilian Central Bank issued a new note in which it indicates that the Monetary Policy Committee (Copom) may reduce the interest rate again. This change in Brazilian monetary policy intends to further slow the country's economy, mainly due to the unfolding of the economic crisis generated by the new coronavirus (Covid-19).

Meanwhile, in Brazil, Economy Minister Paulo Guedes insists on long-term reforms (pension reform, administrative reform, and tax reform) to combat short-term economic issues (coronavirus and Fed interest rate cuts).

Concurrently, in Brazil, rains on the coast of São Paulo and Rio de Janeiro cause the death of 19 people and leave hundreds homeless. The labor market in Brazil, according to IBGE, continues to break records in the growth of informality. For this reason, according to the IBGE, "since 2016, the country has shown a drop in the proportion of the employed population that contributes to a social security institute". This may result in the effects of the Pension Reform not having the results expected by the government.

Brazilian BC cuts Selic and rate drops to historical level of 4.25% per year

The Monetary Policy Committee (Copom) of the Central Bank (BC) of Brazil decided to reduce the basic interest rate, the Selic, from 4.5% to 4.25% per year. This is the lowest Selic rate since 1999 when Brazil adopted the monetary policy of inflation targeting.

The expectation of financial market specialists in Brazil is that the Selic will only rise again in 2021. In a statement, the Copom stated that its next steps "will continue depending on the evolution of economic activity, the balance of risks and the projections and expectations of inflation, with increasing weight for the calendar year 2021".

In general, the Brazilian financial market understood the new cut as a wise decision by the Brazilian Central Bank, as it will reduce interest rates and may positively impact the productive sectors of the economy, which, in turn, may increase the generation of jobs in Brazil. The measure also helps to lower the country's public debt costs.

Despite the Selic cut, market interest rates remain exorbitant in Brazil. According to an article published in the Jornal dos Economistas, written by the national coordinator of the Brazilian Citizen Debt Audit, Maria Lucia Fattorelli, the fault lies with the Brazilian Central Bank itself.

She believes that "the financial market charges interest as it sees fit on loans, overdraft, credit card etc. First, because there is no regulation that limits interest: it should be noted that since 2003, part of Article 192 of the Brazilian Constitution that limited real interest to 12%, above which the practice of usury would be configured ".

Copom reduces basic interest rates of the Brazilian economy to the lowest level in history: 5% per year; the rate is expected to continue to be reduced at future meetings

For the third time in a row, in a decision that was already expected by financial analysts, the Brazilian Central Bank (BC) lowered the basic interest rates of the economy. Unanimously, the Monetary Policy Committee (Copom) reduced the Selic rate to 5% per year, with a 0.5 percentage point cut.

With today's decision, Selic reached its lowest level since the beginning of the Central Bank's historical series in 1986. From October 2012 to April 2013, the rate was maintained at 7.25% per year and has now been readjusted. gradually until it reached 14.25% per annum in July 2015. In October 2016, the Copom again reduced the basic interest rates of the economy until the rate reached 6.5% per annum in March 2018. Now the country reached 5% per annum.

At the meeting of the Monetary Policy Council (Copom) of the Brazilian Central Bank, which took place today, a new 0.50 pp cut in the Selic rate was practically anticipated at the next meeting, in December 2019. The Copom also introduced, in the balance sheet risks, the lagged effects of the stimulating monetary policy (upward risk of inflation) and mentioned that the current stage of the economic cycle recommends caution in any further adjustments in the degree of the stimulus.

The minute of the Copom meeting also pointed to projections for the 2020 IPCA between 0.30 pp and 0.40 pp below the 4.0% target. Therefore, the Selic terminal is expected to be between 4.0% and 4.5% in the coming months. More cuts thus likely as reforms go through, according to the Copom minute. 

Cost of living in Brazil: Brazilian financial market declined, for the eleventh consecutive time, now the country's inflation forecast in 2019 fell from 3.28% to 3.26%

Financial market economists reduce the inflation estimate for this year and also a forecast for the economy's basic interest rates at the end of 2019 – from 4.75% to 4.5% per year. Some analysts believe basic interest rates in Brazil are likely to fall even lower in early 2020.

As the projections appear in the market bulletin known as the report Focus (Relatório Focus), released today (21.10.2019) by the Brazilian Central Bank (BC). The report is the result of a survey conducted last week with more than 100 financial institutions.

According to one institution, financial market analysts have lowered the inflation estimate for this year from 3.28% to 3.26%. It was the first consecutive drop in this indicator.

According to the Brazilian Central Bank, Brazil's GDP in July 2019 fell 0.16% over the previous month

The Brazilian Central Bank Economic Activity Index (IBC-Br), considered a kind of informal "preview" of Brazil's GDP, fell by 0.16% in July 2019, compared to June of the same year. This is the worst result for the month in the last three years.

In the first seven months of 2019, Brazil's GDP registered growth in just two months, May (1.16%) and June (0.34%). All other months of 2019 showed negative numbers.

According to the Focus Bulletin, a survey conducted by the Brazilian Central Bank, the financial market forecast for 2019 GDP is 0.87%.

Brazilian services and commerce sectors surprise with unexpected growth but do not recover losses in the year, according to IBGE

According to the Monthly Survey of Services, released by IBGE today (12.09.2019), there was a 0.8% growth in the service sector between June and July 2019, in Brazil. Analysts and economists expected growth of around 0.4%. This is the best result since December 2018. However, despite this slight recovery, Brazil's services sector is still 11.8% below the record reached in May 2014 and 1.2% lower than December last year.

Another sector that posted positive numbers this week was the Commerce sector in Brazil. According to the Monthly Trade Survey, released by IBGE, retail sales in Brazil increased 1% in July, compared to June, and had the third positive month in a row. It is the best result for July since 2013 when the advance was 2.7%.

This scenario reinforces the projections that bet on more cuts in the basic interest rate in Brazil, Selic, by the Brazilian Central Bank's Monetary Policy Committee (Copom) in the coming months.

Bradesco (BBDC4) estimates that the basic interest rate of the Brazilian economy, the Selic, could close 2019 at 4.75%

Banco Bradesco revised its forecast for Brazil's basic interest rate, Selic. Now the bank's expectation is that Selic will close 2019 at 4.75% and remain at this level until the end of 2020. The previous forecast was that interest would be at 5%.

For Bradesco, the Monetary Policy Committee (Copom) of the Brazilian Central Bank should promote two further cuts of 0.50 percentage points in the September and October meetings. Afterward, Bradesco believes that the Copom will reduce 0.25 percentage points in the December meeting. That would lead to 4.75% the rate that currently stands at 6%.

This bet by Bradesco increases the pressure on the Copom and the Brazilian Central Bank, as it adds to the criticism that many economists are making against the current government's economic policy.

For economist Laura Carvalho, for example, the Copom "amid high unemployment, economic stagnation, rising wage inequalities, and below-target inflation expectations, waited" until the end of July 2019 to reduce unemployment. Selic rate by 0.5 percentage point to 6% per annum.

So far, the fall of Selic and the approval of the Social Security Reform have not been enough to leverage the Brazilian GDP. Jair Bolsonaro's government has so far presented no plans to reactivate the Brazilian economy. This, coupled with the absurd statements of both the president and ministers of his government, make the future scenario of the Brazilian economy even more uncertain.

Focus Survey indicates positive Brazilian financial market expectations for Brazilian economy despite the risk of a global economy crisis

According to Reuters, the market's expectation for growth in the Brazilian economy has risen again for 2019 and 2020. The Focus survey released today by the Central Bank indicates that Brazilian economists have come to see the possibility of growth in GDP. 0.83% in 2019 and 2.20% in 2020, compared to 0.81% and 2.10% respectively in the previous week.

This reading seems to be detached from global and regional reality. In the world last week was marked by fear of the world going into recession; In Argentina, the economy minister fell and the current president Mauricio Macri, with fear of losing the elections, decided to adopt a completely populist agenda in the economy.

It will be very difficult for Brazil's economy to grow, which Focus indicates today if these scenarios of global recession and the certainty of the continuing crisis in Argentina, Brazil's main regional economic partner, are confirmed.

Again, as when the election of Jair Bolsonaro occurred, the Brazilian financial market takes a stance much more closely linked to political ideology than the rational readiness of global and regional economic indicators.

Chaotic and volatile week scares the Brazilian financial market; the Ibovespa (IBOV) index varied almost 3 thousand points yesterday

Almost two months after hitting the previously unprecedented 100,000-point mark, the Bovespa Index, the Ibovespa (IBOV), has again curved against the strong risk aversion in the international market. In an environment of intense volatility since June 19, when the Ibovespa it had been holding above 100,000 points, reaching over 105,000 on July 10. From that peak, the international market turmoil coupled with the election results in Argentina and the unpreparedness of Brazilian President Jair Bolsonaro's government to participate in political negotiations in the country and internationally have been holding back the index's advance beyond this level. Since then, the index has fallen by 6.39%.

The actions of the Brazilian Central Bank helped to hold the dollar around the 4 reais, which, in a way, helped calm the financial market a bit.

Today the Ibovespa has opened up, but in recent days the index has shown very large variations. This morning, the index recovered part of the accumulated losses in recent days. A scenario of corrections for the violent falls of recent days.

Inequality does not stop growing in Brazil and already reached 23.3 million people; unemployment reaches 12 million people

According to a study by FGV Social economist Marcelo Neri, Brazil faces the longest period of increasing inequality in its history. There are already 17 consecutive quarters of the increase in income concentration in the country. The survey also notes that the number of poor grew in the country and reached 23.3 million in 2017, the most recent data. These are people who live on less than 233 reais per month.

To make matters worse, more than 13 million Brazilians live in poverty or extreme poverty, according to data released this week by the Unified Registry of the Ministry of Citizenship.

Unemployment continues to erode Brazilian society. According to IBGE, 3.3 million unemployed people have been looking for work for at least 2 years in the country. This number corresponds to 26.2% of the 12.8 million Brazilians who were unemployed in the second quarter of 2019.

Meanwhile, the latest Focus Report, released by the Brazilian Central Bank, predicts that the economy will grow a meager 0.81% in 2019. A very small number in the face of rising inequality and unemployment affecting Brazilian society.

The financial market in Brazil closes down for the second day in a row; Ibovespa (IBOV), B3's main index, falls below 100,000 points

The Ibovespa closed down today. The index closed the day at 99.056 points, but the drop during the day reached the level of 2%. However, at the end of the day, the index fell 1.2%.

The day on the Bovespa was marked by investors selling stocks and looking for safer assets. It was a flight to quality movement.

Global risk aversion, fearing a new economic recession, has forced the Brazilian Central Bank, for the first time since the 2009 crisis, to announce that it is going into cash to control the rise in the US currency. The Brazilian Central Bank has also announced that it will offer foreign exchange swap contracts.

Today, at an event promoted by BancoSantander in São Paulo, the Minister of Economy, Paulo Guedes, minimized global economic adversity. He said that he had no fear of being swallowed by the international market and that Brazil did not need Argentina to grow its economy.

In fact, the crisis in Argentina has affected and continues to affect the Brazilian economy. Guedes's phrase shows a mixture of arrogance and unpreparedness for the post of Minister of Economy.

The crisis in Argentina, Brazil's third-largest trading partner, affects everything from the Brazilian tourism industry to bus, beer and steel companies. To say that Brazil does not need Argentina is to ignore how the Brazilian economy works.

Brazil enters in "technical recession" after disclosure of preview of the first quarter of 2019 GDP made today by the Brazilian Central Bank

The Brazilian economy registered a retraction of 0.13% in the second quarter of 2019, according to the Economic Activity Index (IBC-Br) released by the Brazilian Central Bank today. This puts the country in a "technical recession" framework "when you have two quarters in a row of economic contraction i.e. our economy shrinks and things go south."

This index is a preview of GDP, which will be released on August 29 by the Central Bank. The 0.13% decline reported today occurred between April and June 2019 compared to the first quarter of the same year.

The Brazilian Minister of Economy, Paulo Guedes, said today at an event held at the Superior Court of Justice (STJ) that it is not possible to blame the current government for the economic performance of the country.

According to the newspaper Correio Braziliense, Guedes said that "It is still a short time for the government with liberal policies in the economy to present results."

Brazilian Chamber of Deputies approved the Social Security Reform in the second round; text now goes to the Senate

Pension reform is expected to produce savings of approximately R$ 900 billion over the next 10 years. This number is very close to what the Brazilian financial market expected. Now the text of the Reformation goes to the Senate, but it shouldn't change much.

Even with the approval of the Pension Reform, analysts believe that the year 2019 is already lost. That is, the Brazilian economy must remain stagnant or with very low growth until the end of the year.

The basic interest rate cut of the Brazilian economy, Selic, should continue. The Brazilian Central Bank, through the Copom, cut interest rates from 6.5 to 6% per year. Analysts believe the Copom should cut interest rates again to 5.5% at the next meeting, or at least cut interest rates by 0.25% to 5.75%.

After cutting the basic interest rate from 6.5% to 6% per year, Selic, by Copom, the Brazilian Central Bank takes a more "dovish" stance

The Monetary Policy Committee (Copom) of the Brazilian Central Bank reduced from 6.5% to 6% per year the basic interest rate, the Selic rate. The cut aims to increase the possibility of further economic growth in Brazil.

According to bank XP, the ruling shows that the central bank has taken a more "dovish" stance, that is, more lenient about inflation.

For professor Paulo Feldmann, from USP's School of Economics, Administration, and Accounting (FEA), “average income has fallen a lot, 1.3% a year ago. If we consider that in this period there was inflation around 5%, the fall in average income is even greater, around 6%. That is, people have less income to consume.”

Feldmann believes that reducing to Selic is not enough. For him, "the Brazilian Central Bank should act by forcing a reduction in interest rates for loans to both individuals and companies. It is very illusory to think that now that Selic has fallen to 6% Brazil will grow."

Cost of living in Brazil: IGP-M slows in July, a rising dollar and financial market betting massively on Selic interest rate cut

According to the Getulio Vargas Foundation (FGV), the General Price Index - Market (IGP-M) decelerated to 0.40% in July after showing a high of 0.80% in June. With the July result, the IGP-M accumulated high of 4.79% in the year and 6.39% in 12 months.

Meanwhile, the Brazilian financial market is betting heavily on the 0.50% cut in the economy's base interest rate, the Selic, which is currently at 6.50%.

Some more cautious analysts believe that the Brazilian Central Bank, at the next Copom meeting to be held tomorrow, July 31, should cut Selic by only 0.25%, leaving the annual interest rate at 6.25% per year in Brazil.

The dollar price in Brazil closed again high yesterday, July 29. The US currency ended the day at 0.29% appreciation, selling at R$ 3.7830.

Brazilian financial market bets on Selic interest rate cuts in Brazil

Interest rate cuts in Brazil are more than priced on curves. Now, after the approval of the first-round Social Security Reform in the Chamber of Deputies, the Brazilian financial market expects the next Copom meeting to decide to cut the basic courses of the Brazilian economy.

Currently, Selic is at 6.5% per year. The Brazilian financial market bets on a cut of at least 0.25%. There are also those who bet on a 0.50% cut.

The Focus Report released today by the Brazilian Central Bank presented a scenario of the Brazilian economy without major changes. According to Focus, there is an upward trend in the exchange rate in Brazil – the projected exchange rate for 2020 remains at R$ 3,90 – which indicates that foreign investors have not yet raised their capital in Brazil.

Cost of living in Brazil: fall in fuel prices causes the Extended National Consumer Price Index 15 (IPCA-15) to rise only 0.09% in July

Increases in airfare and electricity prices in Brazil were not sufficient to produce a big rise in inflation in July 2019. The Broad National Consumer Price Index 15 (IPCA-15) rose 0.09% in July after registering an even lower growth of 0.06% in June. The main factor for this very small growth was the fall in fuel prices.

With a stable IPCA, several Brazilian economists are betting on a 0.25% reduction in the basic interest rates of the economy (Selic). IPCA closes June up just 0.01%, reflecting weak demand and the contraction in food and fuel prices. Without cost-of-living pressure, analysts are predicting a drop of at least 0.25 percentage points in the Selic rate at the next Copom meeting in the last two days of July. Currently, the Selic rate is at 6.5% per year.

With Selic at this level in Brazil, fixed-income investments such as savings, floating-rate CDBs, DI funds, and Selic Treasury bonds pay less, as their yields are pegged to the Selic rate.

Ibovespa (B3) closed the day at 103,802 points and fell 0,1%

Following the falls on Thursday and Friday of last week, the Brazilian financial market closed again in decline. The prospect of approval of the Pension Reform in the second half of 2019 only helped to slow the São Paulo Stock Exchange.

According to the G1 website, Ibovespa, B3, "closed down this Monday (15.Jul.2019), with an eye on the local scenario after approval of the main text of the pension reform in the first round in the House and with the definition that the second round will take place only in August."

According to the Focus Bulletin, released today, the Brazilian economy is expected to grow by only 0.81% in 2019. Economists interviewed by the Brazilian Central Bank for the Focus Bulletin have reduced for the twentieth time the Brazilian GDP growth forecast in 2019.

The financial market in Brazil is negatively impacted by the political disagreements of the current government

The political swoops between President Jair Bolsonaro and his ministers with the National Congress are worrying Brazilian investors. The Social Security Reform has been going a long way because of the efforts of the mayor of the Chamber of Deputies, Rodrigo Maia. However, Maia and other deputies involved in the Reformation continue to have disagreements with the government of Jair Bolsonaro. Most of these disagreements arise because of the complete lack of political ability of the federal government.

According to the Folha de S.Paulo newspaper, this political disarticulation added to the "pressure of parties and the lobby of public servants impinges" the Pension Reform.

Brazilian financial market fears possible delay in voting on Pension Reform

The Brazilian financial market remains apprehensive to know if it will happen today, 27.Jun.2019, the reading of the Pension Reform report. The delay for the national political framework to discuss, vote and possibly approve the Pension Reform leaves investors in Brazil very apprehensive. Everyone already believes that the year 2019 is lost.

As the inflation framework in Brazil is not worrisome, due to the weakness of the Brazilian economy, everything indicates that in the second half the Brazilian Central Bank will cut the basic interest rates, which are currently at 6.5% per year.

The fear of some federal deputies losing the vote of the Pension Reform, since many are celebrating the feasts of São João in their respective states, can delay the entry of the Brazilian states into the new Social Security. This impasse is delaying the reading of the complementary vote of the rapporteur and federal deputy, Samuel Moreira. 

According to UOL website, "the inclusion of states and municipalities in Pension Reform is necessary because they are also breaking down. The deficit in the states reaches R$ 100 billion today and can quadruple until 2060. However, this inclusion has not yet been made basically because governors and federal deputies are afraid to displease state officials and lose votes."