BCN-11Brazil maintains key interest rate at 6.5%

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ZCZC

BCN-11

BRAZIL-ECONOMY-RATE-CURRENCY-INFLATION

Brazil maintains key interest rate at 6.5%

RIO DE JANEIRO, June 21, 2018 (BSS/AFP) – Brazil’s central bank maintained
its key interest rate at 6.5 percent Wednesday, as expected, with inflation
considered to be under control despite strong depreciation of the real and a
costly truckers’ strike.

The bank said the truckers’ strike, which shut down much of the economy
for more than a week in May, “made it difficult to read the current evolution
of economic activity.”

The bank also said that inflation would spike following the strike, which
saw shop shelves and factories starved of deliveries, driving up prices.

However, this inflationary rise will be temporary, the bank said.

“The basic scenario is for a continuation of the process of recovery in
the Brazilian economy, but at a more gradual rate,” the bank said in a
statement.

Latin America’s biggest economy continues to emerge slowly from its worst
recession in history, which extended through 2015 and 2016.

But there are continuous headwinds.

In May, the central bank interrupted a series of 12 consecutive cuts to
the key Selic interest rate, citing volatility in the markets and investor
frustration over the government’s inability to push through pension reform
and other long-delayed austerity measures.

Interest rate hikes in the United States and a growing trade dispute
between Washington and Beijing contributed to the instability in Brazil, with
emerging markets investors withdrawing capital to safe havens.

One early sign of the turmoil has been the strengthening of the dollar,
which traded at nearly $4 two weeks ago for the first time in two years.

The bank has intervened with $24.5 billion to try and prop up the real and
will inject another $10 billion this week.

Bank chairman Ilan Goldfajn has also sought to bolster market nerves by
noting the country’s “solid” economic fundamentals, including low inflation
and $380 billion in reserves.

The extended truckers’ strike has also added to a rising sense of
political uncertainty ahead of general elections in October. So far, no
strong candidate backs President Michel Temer’s stalled market reforms
program.

GDP growth projections for 2018 have fallen from 2.45 percent just five
weeks ago to 1.76 percent in the latest central bank survey of market
expectations. At the start of the year, the forecast was for three percent
economic growth.

And inflation projections have risen from 3.45 percent to 3.88 percent in
the wake of the truckers’ strike.

However, monetary policy chiefs are keeping calm, since the new inflation
projections remain within the central bank’s target range, which centers on
4.5 percent, with a 1.5 percent margin to each side.

“The main message from today’s… meeting in Brazil is that policymakers
are content to look through a temporary spike in inflation resulting either
from the disruption caused by last month’s trucker’s strike or, more
importantly, a weaker currency,” Capital Economics consultancy said.

BSS/AFP/HR/0950