SÃO PAULO--Brazil's central bank cut its benchmark interest rate by a half point Wednesday, as inflation has remained below target amid increasing signs the economy is improving.
The bank cut the benchmark Selic rate to 4.5%, a record low that follows a series of reductions that brought it down from 14.25% in 2016. In its post-meeting statement, the bank was less clear about its next step than in previous statements, but indicated it's open to continue cutting rates next year.
The bank said it will be cautious as it analyzes the country's economic situation and that its next decision on monetary policy will depend on the economy's response to the current level of interest rates and the outlook for inflation.
"They left the door semi-open," said Roberto W. Secemski, Brazil economist at Barclays in New York. "They didn't commit to another cut, but they said it all depends on economic indicators."
The Selic's historic low comes as unemployment is slowly coming down, economists are raising their growth forecasts for this year and 2020, and the outlook is for inflation to remain under control.
Many economists nevertheless expect the central bank will keep the Selic on hold at its next meeting, on Feb. 5, while watching out for price pressures such as a recent surge in meat prices caused by higher demand in China, a major importer of Brazilian food commodities.
Inflation has been slow, partly because businesses still have plenty of idle capacity after Brazil's 2015-16 recession, the worst on record for the country. Economists at the Brazilian Institute of Economy, or Ibre, calculate that activity was 4.6% below potential in the third quarter, meaning output can still grow without causing prices to rise.
"Activity is far from becoming an inflationary pressure," said Ibre economist Claudio Considera. "The central bank may decide to stop cutting rates because of other factors," such as the exchange rate, he said.
Inflation has been slow partly because businesses still have plenty of idle capacity after Brazil's 2015-16 recession, the worst on record for the country. Economists at the Brazilian Institute of Economy, or Ibre, calculate that activity was 4.6% below potential in the third quarter, meaning output can still grow without causing prices to rise.
"Activity is far from becoming an inflationary pressure," said Ibre economist Claudio Considera. "The central bank may decide to stop cutting rates because of other factors," such as the exchange rate, he said.
The amount of slack in the economy is expected to keep shrinking as the economy accelerates. Economists surveyed by the central bank estimate an expansion of Brazil's gross domestic product of 1.1% this year and forecast growth of 2.24% in 2020. In August, the forecasts were 0.81% and 2.1%, respectively.
"Corporations are showing better-than-expected results," said Pedro Galdi, a stock analyst at Mirae Asset investment firm. "Expectations for next year are increasingly positive."
But the budding recovery already has some analysts worried that low borrowing costs could spur consumers to spend more and put pressure on prices.
"Our productivity is very low, and the pent-up demand is big," said Jason Vieira, chief economist at Infinity Asset investment firm. "With credit getting cheaper, people may start to buy while producers would struggle" to meet demand, he said.
There are signs that unprecedentedly low lending rates are spurring borrowing. Consumers still face double- or even triple-digit rates in their loans, but as of October lending to Brazilian households and corporations had increased 12.7% from a year earlier, even as unemployment remained at a high 11.6%.
The exchange rate also could be an issue because of the effect on the price of imports. The Brazilian real has weakened against the dollar over the course of the year as some investors avoid emerging markets amid trade tensions between the U.S. and China and political tensions in other countries in South America. The currency closed at 4.12 to the dollar on Wednesday, from 3.88 to the greenback on the last day of 2018.
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