Projected Brazil interest rate floor of 2.25% not ‘written in stone’

By Jamie McGeever

BRASILIA (Reuters) – A level of 2.25% for Brazil’s benchmark Selic interest rate is not “written in stone,” central bank economic policy director Fabio Kanczuk said on Wednesday, suggesting that policymakers may be prepared to cut rates more than they have previously indicated.

At a Brazilian-American Chamber of Commerce online event, Kanczuk also said the central bank could buy dollars on foreign exchanges if it feels markets have become too bullish and the Brazilian real’s rally too aggressive.

The real has appreciated about 20% over the last month.

The central bank cut the Selic rate by 75 basis points to a new low of 3.0% in May and said it could repeat the dose this month. But it signaled this would be the end of the easing cycle.

But Kanczuk said that 2.25% “is not written in stone, or something fixed that you cannot cross.” Rates are still “far from the effective lower bound” and the weak economy can be still stimulated via monetary policy rather than asset purchases, he added.

Brazil’s economy is expected to shrink at a record annual pace of more than 6%, according to a Reuters poll of economists.

A wider output gap would call for a lower neutral rate of interest, but huge government borrowing to fund crisis-fighting expenditure would point to a higher rate. Balancing these two factors is policymakers’ main task, he said.

Kanczuk said the Brazilian market rally has not altered the bank’s policy outlook or framework. Financial stability remains a key consideration.

The central bank has spent billions of dollars in currency market intervention this year as the real plunged to near 6.00 per dollar in May. Kanczuk said foreign exchange interventions are only to ensure smooth market functioning and amounts are small.

The central bank has no target level for FX reserves and has only sold “small amounts here and there to make markets work,” Kanczuk said, adding that this tactic could also be used buying dollars.

“Maybe if markets are excessively optimistic, maybe we buy a little bit,” he said.

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