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Brazil: How Much More Monetary Policy Loosening?
- As expected, the central bank of Brazil (BCB) reduced the target for its benchmark Overnight-Selic rate by 50 basis points, to 11.5 percent. This brings to 100 basis points the cumulative interest rate easing since August 31st.
- Given presently known trends and risks, plus the central bank’s public statements and their recent policy history, further cuts are nearly certain in the next few months, likely as little as 100 basis points, possibly as much as 200—unless external events push policymakers into a more aggressive easing, shifting the entire range.
- Given tight conditions in the labor market the central bank is taking a risk as it eases monetary policy. In fact, from a near-term perspective what the bank is implicitly signaling is a willingness to tolerate higher-than target inflation in exchange for an insurance policy against the developing downward growth-dynamics in the world economy and the chance that conditions might be even more challenging in 2012.