Economics Reflection #3
Economics Reflection #3
Economics Reflection #3
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 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%.
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
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