Government maintains key interest rate at 6.5%

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June 20, 2018 10:46 PM

Brazils 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.

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