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    Economics Reflection #3

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    Juliana Ferreira
    The Brazil central bank cut its benchmark interest rate to 6% from 6.5%, the lowest rate since March 2018. This rate cut is aimed at stimulating the country's weak economy and preventing inflation from falling too far below target. The central bank sees room for additional rate cuts if inflation remains benign and economic activity evolves as expected. Some analysts predict the rate could be cut to 5% over the rest of the easing cycle. The rate cut comes after progress on fiscal reforms and looser monetary policy abroad.

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    Economics Reflection #3

    Uploaded by

    Juliana Ferreira
    17 views3 pages
    The Brazil central bank cut its benchmark interest rate to 6% from 6.5%, the lowest rate since March 2018. This rate cut is aimed at stimulating the country's weak economy and preventing inflation from falling too far below target. The central bank sees room for additional rate cuts if inflation remains benign and economic activity evolves as expected. Some analysts predict the rate could be cut to 5% over the rest of the easing cycle. The rate cut comes after progress on fiscal reforms and looser monetary policy abroad.

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    Economics reflection

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    The Brazil central bank cut its benchmark interest rate to 6% from 6.5%, the lowest rate since March 2018. This rate cut is aimed at stimulating the country's weak economy and preventing inflation from falling too far below target. The central bank sees room for additional rate cuts if inflation remains benign and economic activity evolves as expected. Some analysts predict the rate could be cut to 5% over the rest of the easing cycle. The rate cut comes after progress on fiscal reforms and looser monetary policy abroad.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    17 views3 pages

    Economics Reflection #3

    Uploaded by

    Juliana Ferreira
    The Brazil central bank cut its benchmark interest rate to 6% from 6.5%, the lowest rate since March 2018. This rate cut is aimed at stimulating the country's weak economy and preventing inflation from falling too far below target. The central bank sees room for additional rate cuts if inflation remains benign and economic activity evolves as expected. Some analysts predict the rate could be cut to 5% over the rest of the easing cycle. The rate cut comes after progress on fiscal reforms and looser monetary policy abroad.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 3

    Brazil central bank cuts rate to new low, sees room for more

    BRASILIA (Reuters) - Brazil’s central bank cut its benchmark interest


    rate to a new low of 6.00% on Wednesday, an aggressive first move in a
    widely anticipated easing cycle to inject life into a moribund economy
    and prevent inflation from slipping too far below target.

    The reduction from 6.50% was the central bank’s first rate cut since
    March 2018, following significant progress on domestic fiscal reforms
    and looser monetary policy abroad, including the U.S. Federal Reserve’s
    rate cut earlier in the day.

    The bank’s nine-member monetary policy committee, known as Copom,


    voted unanimously to lower the Selic rate by 50 basis points, a move
    predicted by 10 out of 27 economists in a Reuters poll. Fourteen predicted
    a milder 25-basis-point cut.

    In a statement accompanying its decision, Copom noted that inflation has


    evolved “favorably” and that the growth remains weak. Indeed, it said a
    resumption of a gradual recovery is “possible,” underscoring uncertainty
    about an economy flirting with a technical recession this year.

    If the inflation outlook remains benign, additional monetary policy


    stimulus should be possible, Copom added, emphasizing that further steps
    will still depend on how economic activity and the inflation outlook
    evolves.

    “The decision to start with a 50-basis-point cut ... shows that the central
    bank is confident in its strategy. It sees an important shift in the balance
    of risks after the approval of pension reform and the Fed rate cut,” said
    Zeina Latif, chief economist at XP Investimentos.
    “The market will naturally start to bet on more big moves,” she said,
    predicting a further 100 basis points of easing over the cycle to leave the
    Selic rate at 5.00%.

    Analysts had said in the run-up to Wednesday’s decision that recent


    progress on fiscal reforms, which should boost investor sentiment and
    bring down long-term inflationary pressures, would also give the central
    bank cover to cut interest rates.

    Central bank President Roberto Campos Neto had previously sought to


    play down a direct link between a major social security overhaul and a
    rate cut. Copom’s statement on Wednesday echoed its previous one in
    June that uncertainty over the reform was the biggest single obstacle to
    lower rates.

    The government’s proposal to trim pension benefits in order to bring the


    public deficit under control passed by a resounding margin in the lower
    house of Congress earlier in July, but still needs another vote there,
    followed by approval in the Senate.

    Still, the economic and inflation outlook at home and a more benign
    global outlook helped shift the balance, prompting the central bank to
    catch up with market pricing.

    “I did not expect that. The central bank was behind the curve and followed
    the market. Another 50-basis-point cut is coming if pension reform is fully
    approved,” said Jose Francisco Goncalves, chief economist at Banco
    Fator.

    Reporting by Jamie McGeever; Editing by Brad Haynes, Grant McCool and Jonathan Oatis
    Our Standards:The Thomson Reuters Trust Principles.

    https://www.reuters.com/article/us-brazil-economy-rates-decision/brazil-central-bank-cuts-rate-to-
    new-low-sees-room-for-more-idUSKCN1UQ2TA
    Reflection

    The “Brazil central bank cuts rate to new low, sees room for more”, shows how in an attempt to keep

    inflation from falling too far below, Brazil’s central bank has dropped the SELIC rate (overnight rate) by

    0.5%. The Brazilian central bank is executing an expansionary policy with the purpose of stimulating

    economic growth by incentivizing an increase in consumption, investment and Net Exports.

    The execution of the above expansionary policy will create more incentives for households to invest in

    durable goods because the interest rates to finance and borrow money are lower and there will be is less

    incentive for households to save money as the rate of return was reduced, both factors will generate a

    boost in consumption.

    According to Zeina Latif, “the market will naturally start to bet on more big moves” that is another result

    of the expansionary policy implemented, the lower interest rates motivates firms to borrow funds to

    invest in their businesses and increase the firm’s rate of return on its investments. Additionally, the

    number of mortgages should also increase, as the cost of buying houses decreased.

    Likewise, the decrease in the SELIC rate will increase Brazil’s net exports, considering that it will be cheaper

    for foreign countries to export from Brazil and more expensive for Brazilians to import from other

    countries.

    Furthermore, the increase in consumption, investments and net exports, will increase the demand for

    goods, leading firms to increase their production by investing in technology and/or hiring more workers,

    which will increase the country’s output and decrease unemployment rates as a result.

    The article made easier to understand how monetary policies can be influenced by fiscal policies and the

    effects of an expansionary policy on aggregate demand. Seeing a real-life example of how both monetary

    and fiscal policies can indirectly affect the economic scenario of a whole country helped me to better

    associate the concepts learned in class.

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