By Jeffrey T. Lewis and Paulo Trevisani
SÃO PAULO--Brazil's central bank kept its benchmark Selic interest rate unchanged as the inflation outlook deteriorates while the country struggles with the economic impact of Covid-19.
The bank as expected Wednesday left the Selic at a record low of 2% for the fourth straight meeting. The bank removed its previous forward guidance, saying some of the conditions set to maintain it are no longer satisfied, in a sign policy makers want to have flexibility to raise rates if necessary in coming months.
"Inflation expectations, as well as inflation projections in its basic scenario, are sufficiently close to the inflation target for the relevant monetary policy horizon. As a consequence, the forward guidance ceases to exist and the conduct of monetary policy will henceforth follow the usual analysis of the balance of risks for prospective inflation," the bank said in its statement.
The bank added that the end of the guidance doesn't mean a rate increase will be automatic because higher-than-normal monetary stimulus is still justified.
The bank's policy makers normally focus on the outlook for inflation when making their rate decisions, but this year they face other unpredictable situations that also require close monitoring. The bank first issued the forward guidance in August, the last time the bank cut the Selic, saying at the time it wanted to clarify policy makers' intentions amid heightened uncertainty.
The bank in August outlined criteria for maintaining the guidance: the outlook for inflation, the continued anchoring of inflation expectations and the government maintaining fiscal responsibility. The bank said that while the forward guidance was in place, rate cuts could occur but not rate increases.
"Looking at the bank's checklist, I don't necessarily see reasons to drop the forward guidance now," said Roberto Secemski, an economist at Barclays in New York who expects the bank to start raising the Selic in August. "But I do understand the possible preference the central bank might have for adding flexibility for future decisions by removing the restraints of the forward guidance."
Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com
(END) Dow Jones Newswires
01-20-21 1709ET
