Against Expectations, Brazil's Central Bank Maintains Interest Rate at 6.5%

05/17/2018 - 13h20

The Brazilian Central Bank reacted to the recent surge in the dollar exchange rate and decided to keep the country's benchmark interest rate (Selic) at 6.5% a year. The institution also indicated that the cycle of interest rate cuts has ended - it began in October 2016, when the rate was as high as 14.25%.

The Central Bank's Monetary Policy Committee (Copom) decided that the most recent turbulence in the international market made a new cut in the interest rate unnecessary - it remains at the lowest level in the country to date.

The decision surprised financial market analysts, who expected a new cut of 0.25%, reaching 6.25%.

Economists say that the decision to maintain the Selic at the current level could be explained by the fear that the recent dollar appreciation would lead to a hike in inflation and a fall in investments.

The difference between the interest rate in Brazil (considered riskier) and that of the U.S. (safer) was narrowing. Specialists believe that this made the Brazilian market less attractive and contributed to the dollar surge. Yesterday, the dollar closed at R$ 3.68.

Earlier in the morning, the Central Bank had disclosed that the economic activity measured by IBC-BR indicator ended this year's first quarter with a decline of 0.13% in comparison to the last quarter of 2017. The result frustrated the most pessimistic expectations and led to new forecasts for the country's 2018 G.D.P.

Most analysts now forecast a 2% increase, far from the 3% originally predicted by the Temer administration. It is expected that the Ministry of Finance will also lower its forecast.

Translated by THOMAS MUELLO

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