The COPOM unanimously cut the SELIC overnight rate by 100bps to 8.25%.According to the COPOM communiqué, assuming a SELIC rate at 7.25% at theend of 2017, 7.0% at the beginning of 2018and 7.5% at the end of 2018, the BCBforecasts inflation of 3.3% (versus 3.6% at the previous meeting) for 2017and4.4% (versus 4.3%) for 2018(below the 4.5% target). These forecasts suggest thatthe easing cycle will terminate with the SELIC rate around 7.0%, in our opinion.The authorities stressed that the current economic situation requires monetarystimulus, which means keeping interest rates below their neutral level for sometime, although they also argued that economic reforms (such as replacing theTJLP rate charged on BNDES loans with the new TLP rate, a measure alreadyapproved by Congress) tend to reduce the neutral rate. The COPOM signaled aslower pace of easing for the next meeting, claiming that “a moderate reductionin the pace of easing” would be appropriate. We forecast a 75bp cut for the nextCOPOM meeting in October and expect a final rate cut of 50bps in December.While we now expect the SELIC to remain unchanged at 7.0% throughout 2018(versus our previous forecast of 7.25%), an even deeper-than-expected processof disinflation could prompt the BCB to cut rates further. Also see Brazil Update.

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