Brazil holds interest rate at record low

Brazil’s central bank held its benchmark interest rate at a record low of 2% on Wednesday, December 9, despite a recent uptick in inflation, deciding the priority was reviving the pandemic-battered economy rather than reining in prices.

The unanimous decision by the central bank’s 9 governors was in line with market expectations and unlikely to cause waves in Latin America’s biggest economy.

“The current level of extraordinarily high monetary stimulus is adequate,” the bank’s monetary policy committee said in a statement.

“Although inflationary pressure is strong in the short term, the committee’s diagnosis remains that this is temporary.”

Brazil exited recession in the 3rd quarter of the year with economic growth of 7.7%.

But the South American giant is still reeling from the effects of COVID-19, which has killed more than 178,000 people, the world’s 2nd highest death toll in the pandemic after the United States.

The International Monetary Fund is predicting Brazil’s economy will shrink 5.8% on the year for 2020, after contracting 2.5% in the 1st quarter and 9.7% in the 2nd.

Hoping to turn things around, far-right President Jair Bolsonaro’s government has rolled out a massive emergency aid package to help poor families hit hardest by virus shutdowns.

The emergency cash benefits 67 million low-income workers, nearly one-third of the population, at a cost of 615 billion reais ($119 billion) so far.

That amounts to a whopping 8.6% of the country’s gross domestic product (GDP).

Analysts say the influx of cash is fueling a rise in inflation, which hit a 5-year high in November, driven largely by food prices.

The annual inflation rate of 4.31% is above the central bank’s target of 4%, though within its acceptable range of plus or minus 1.5 percentage points.

The emergency benefit is too costly for the government to maintain without breaking Brazil’s constitutionally mandated spending cap next year, and analysts generally expect it will end as scheduled next month.

The market forecast for inflation next year is 3.34%, below the central bank’s target of 3.75%.

Given that relatively tame outlook and the impending end of the pandemic emergency spending, the bank opted to continue boosting growth.

“Uncertainty about the rate of economic growth remains higher than usual, especially after the end of the year, in combination with the expected chill of the emergency aid effect,” it said. – Rappler.com