Brazil holds interest rates as EM currencies get battered


Brazil’s central bank left its key interest rate unchanged on Wednesday, pausing after a string of a dozen consecutive cuts.

The move follows the worst day in a year for emerging market currencies as a stronger dollar and a surge in US bond yields sapped investors’ hankering for the asset class.

Policymakers unanimously decided to leave key Selic rate at a record low of 6.50 per cent. In 2016, when Brazil began its easing cycle, rates in Latin America’s largest economy were among the highest in the world at 14.25 per cent, accompanied a period of low inflation.

Following the end of the worst recession in the history of the country last year, the pace of Brazil’s recovery continues to be bumpy and sluggish. Economists hoped a monetary stimulus will help boost it through the uncertainty of the country’s general elections in October, in which there is still no clear leader.

Yet signs the US economy is in robust health have left fewer investors interested in emerging markets. This has prompted a rethink on countries with limping growth, like Brazil and neighbouring Argentina. The latter has been wrestling with a loss of investor confidence, which dragged the peso down.

With the US on track to raise borrowing costs, the central bank said in a statement that additional easing was “unnecessary”, and ruled out further cuts. It also noted:

The external scenario became more challenging and volatile. The evolution of risks, largely associated with the normalisation of interest rates in some advanced economies, has led to adjustments in the international financial markets. As a result, there was a reduction in risk appetite for emerging economies.

Amid concerns about whether a market-friendly candidate — who would push through much-needed fiscal reforms — will win Brazil’s wide-open election, on Tuesday the real tanked, trading at its lowest price in more than two years. The Brazilian currency remained largely flat on Wednesday.

Analysts at Capital Economics said Wednesday’s decision “was a clear response to the fall in the real over the past couple of weeks and the sell-off in EM markets more generally. The macro fundamentals point to interest rates remaining at their current record low for some time but October’s election could yet force the central bank into action.”


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Brazil holds interest rates as EM currencies get battered

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