Brazil central bank maintains key interest rate at 2%

[BRASÍLIA] Brazil's central bank maintained its benchmark interest rate Wednesday at two per cent, a record low, highlighting its "caution" in the face of uncertainty related to the coronavirus pandemic.

The move ends a spree of nine consecutive cuts, and most analysts predict that the rate - which stood at 6.5 per cent in June 2019 - will remain at two per cent until at least the end of the year.

The central bank's monetary policy committee in a statement emphasised the "uncertainties over the rate of growth of the economy" and indicated that "inflation is expected to increase in the short term."

Inflation rose to 0.7 per cent from January to August, with a forecast of 1.94 per cent for the year, well below the target of four per cent and target range of 2.5 to 5.5 per cent.

This small change, however, masks a very sharp increase in the price of food (up 6.1 per cent over the first months of the year), including a surge in essentials for the average Brazilian diet, with rice up 19.3 per cent and black beans up 28.9 per cent.

This increases is caused in particular by a boom in exports, especially to China, due to the depreciation of the Brazilian real, which lost 27 per cent of its value against the dollar in one year.

Demand in the domestic market has meanwhile increased, thanks to the government's allocation of some 600 reais (S$152) over five months to more than 60 million people, to help limit the economic impact of the coronavirus crisis on the nation's poor.

The business sector is also concerned over difficulties faced by President Jair Bolsonaro's government in advancing its austerity reform programme.

Debt, which represented 75.8 per cent of GDP in 2019, is expected to approach 100 per cent by the end of the year.

Brazil entered a recession in the second quarter, with a record 9.7 per cent GDP contraction, but forecasters were initially more pessimistic.

AFP