UPDATE 2-Brazil cuts rates, pledges full arsenal in coronavirus fight

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By Jamie McGeever

BRASILIA, March 18 (Reuters) – Brazil’s central bank on Wednesday cut its benchmark interest rate by 50 basis points to a record-low 3.75% to cushion the economic blow of the coronavirus pandemic, but signaled no rush to cut again and emphasized the need for more economic reforms.

The decision by the bank’s nine-person rate-setting committee known as ‘Copom’ was unanimous, and comes as more economists are predicting recession this year. Brazil’s main stock index has plunged 35% this month alone and the currency has sunk to new lows on a near daily basis.

In their decision, policymakers flagged the global slowdown triggered by the new coronavirus, which they said had still not appeared in Brazilian economic data.

The central bank “will continue to deploy its arsenal of monetary, exchange rate and financial stability policies to fight the current crisis,” Copom said in their statement.

Stress in financial markets has prompted the central bank to ramp up its foreign exchange interventions and, in conjunction with the Treasury, wade into the bond market to provide liquidity.

Economists said Copom treaded a fine line between acting to fight the mushrooming crisis, and not going too far for fear of weakening the currency even further and fueling inflation expectations.

“They tried not to create any more market instability than there already is,” said Julia Braga, associate professor of economics at Universidade Federal Fluminense in the state of Rio de Janeiro. “They struck a good balance.”

Underscoring how much and how quickly the economic outlook has deteriorated, Goldman Sachs on Wednesday said it now expects Brazil’s economy to contract 0.9% this year, compared to a 1.5% growth forecast only two weeks ago.

The Brazilian real’s slide has accelerated in recent weeks, and it is now down almost 25% against the dollar this year. Yet the central bank said that its “hybrid” forecasting model with a constant exchange rate of 4.75 reais per dollar inflation will be 3.0% this year and 3.6% next.

Its official targets are 4.00% this year and 3.75% next.

In their statement, policymakers said any doubts about the government’s economic reform agenda could push up risk premia.

“Under such circumstances, additional monetary easing may be counterproductive and result in a tightening of financial conditions,” they said. (Reporting by Jamie McGeever Editing by Brad Haynes and Diane Craft)

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