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Brazil cenbank warns of rising uncertainty over economic recovery -minutes

Credit: REUTERS/ADRIANO MACHADO

Brazil's economy requires "unusually strong" monetary stimulus as the recovery from the worst of the COVID-19 crisis faces headwinds and inflation remains significantly below target, minutes of the central bank's last policy meeting showed on Tuesday.

By Jamie McGeever

BRASILIA, Sept 22 (Reuters) - Brazil's economy requires "unusually strong" monetary stimulus as the recovery from the worst of the COVID-19 crisis faces headwinds and inflation remains significantly below target, minutes of the central bank's last policy meeting showed on Tuesday.

With the benchmark Selic interest rate at a record low 2.00%, however, the room for further reductions is minimal, meaning policymakers will increase their reliance on 'forward guidance' to keep borrowing costs lower for longer.

The minutes of the Sept. 15-16 meeting of the bank's rate-setting committee, known as 'Copom,' where the Selic rate was kept on hold at 2.00%, showed growing unease over the sustainability of the economy's rebound.

"The poor predictability associated with the evolution of the pandemic and the necessary decline in emergency aid by the end of 2020 increase uncertainty about the speed of the economic recovery," the minutes said.

"The Committee considered that this unpredictability and the risks associated with the evolution of the pandemic may imply ... an even more gradual recovery," they said.

Policymakers characterized the recovery as "partial," and noted that some parts of the dominant services sector remain "significantly depressed."

They see inflation risks in both directions, but noted that disinflationary pressures from reduced demand may last longer than in previous recessions.

Inflation and inflation expectations remain significantly below target over the next couple of years, but policy is "close to the level from which further interest rate reductions could be accompanied by asset price instability."

Given Brazil's "relative fiscal fragility and the uncertainties regarding its prospective fiscal path," any further rate cuts would be "small," and "demand caution and additional gradualism," Copom said.

Policymakers reiterated their view that economic reforms and fiscal adjustments are "essential" for a sustained economic recovery, as well as being key conditions for maintaining its loose policy stance.

Doubts about the government's commitment to fiscal discipline could raise financial market risk premia and structural interest rates, policymakers warned.

(Reporting by Jamie McGeever; Editing by Kevin Liffey and Nick Zieminski)

((jamie.mcgeever@thomsonreuters.com; +55 (0)11 97189 3169; Reuters Messaging: jamie.mcgeever.reuters.com@reuters.net))

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