Copom makes new cut and Selic rate drops to 2% per year

The Monetary Policy Committee of the Central Bank (Copom) decided on Wednesday (5) to reduce the basic interest rate of the Brazilian economy from 2.25% to 2%. That was the ninth cut followed at Selic. The decision was unanimous.
The cut renewed the lowest historical level for the Selic rate since 1999, when the inflation target regime came into force.
The reduction in Selic followed the expectations of financial market analysts. For them, this decision ends the cycle of cuts started in August 2019.
In a statement, the committee said it understands that the economic situation continues to demand "extraordinarily high" monetary stimulus, but acknowledged that "due to prudential and financial stability issues, the remaining space for monetary policy use, if any, should be small."
According to Copom, any future adjustments in monetary stimulus will depend on the perception of the fiscal trajectory.
"Copom believes that persevering in the process of reforms and adjustments necessary in the Brazilian economy is essential to enable the sustainable recovery of the economy. The Committee also points out that questions about the continuity of reforms and permanent changes in the process of adjusting public accounts can raise the structural interest rate of the economy," the statement said.
By reducing the Selic rate, BC stimulates the level of activity. This occurs at a time of strong contraction of world GDP, due to the pandemic of the new coronavirus. In recent weeks, indicators have pointed to a principle of recovery of the economy in Brazil.
In July, the Brazilian government maintained its forecast for this year's Gross Domestic Product (GDP) drop by 4.7%, while financial market economists have recently improved their estimates. Last week, they predicted a 5.66% drop for the economy this year.
With the sharp drop in economic activity, price change has been low. In June, the National Broad Consumer Price Index (IPCA) recorded inflation of 0.26%, after two months of deflation. In the twelve months to June, the index rose 2.13%.
The Central Bank sets the basic interest rate, Selic, based on the inflation target system.
For this year, the core target is 4%. Under the current rule, the IPCA can range from 2.5% to 5.5% without the target being formally missed. For 2021, the central inflation target is 3.75% and will be officially met if the rate fluctuates from 2.25% to 5.25%.
The financial market predicts that the IPCA will be at 1.63% this year, that is, below the 2.5% floor predicted by the target system, and 3% next year, below the central target but within the allowed band.
In an analysis signed by its chief economist, Mario Mesquita, Itaú bank estimated that the BANK should reduce interest rates to 2% per year on Wednesday mainly due to "recent inflation data, which were more benign than expected."
"The [B.C. Monetary Policy] committee should continue to stress that we are facing a particularly uncertain environment. If, on the one hand, credit stimulus and income recomposition programs can mitigate the recession, on the other hand, if we continue to observe additional disinflationary pressures, this will imply a downward trend in inflation projections," he added.