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The Brazil central bank (BCB) in its first monetary policy of 2017, surprised markets with a deeper interest rate cut of 75 basis points to 13 percent, hitting the lowest level since March 2015. This rate cut was higher than the market expectations of 50 basis points.
The central bank in its monetary policy statement noted that the deeper cut in interest rate was supported by the recent decline inflation rate in 2016, which fell to 6.3 percent by the end of 2016. Also, the BCB lowered its inflation rate forecasts to 4.0 percent and 3.4 percent for 2017 and 2018 respectively.
According to the Brazilian central bank committee members, the action was driven by recent decelerating inflation figures, causing widespread disinflation fear. Additionally, sluggish economic growth strengthened the case for a deeper rate cut, they added.
Further, members noted that the current economic conditions made it appropriate to frontload the monetary easing cycle and allow further easing. Looking ahead, the members said that the extension of the easing cycle and possible revisions to it will continue to depend on inflation expectations.
The policy announcement was released outside of active trading hours for the Brazilian Real exchange rate. However, the MSCI Brazil Capped Exchange Traded Funds (ETFs), an index composed of Brazilian equities, rallied as much as 1.6 percent as the interest rate decision crossed the wires.
