
Brazil Central Bank Cuts Rates, More Reductions Expected Amid ‘Adverse’ Conditions, According to Reuters
By Marcela Ayres
BRASILIA – Brazil’s central bank lowered its benchmark interest rate by 50 basis points on Wednesday for the third consecutive time, signaling a continuation of this trend in upcoming meetings. However, it also noted the challenging external conditions facing emerging economies.
The rate-setting committee, known as Copom, unanimously decided to reduce the Selic benchmark interest rate to 12.25%, a move anticipated by all 40 economists surveyed.
In its statement, the central bank indicated, “If the scenario evolves as expected, the committee members unanimously anticipate further reductions of the same magnitude in the next meetings and believe that this pace is appropriate to maintain a necessary contractionary monetary policy for the disinflationary process.”
Despite the likelihood of ongoing rate cuts, the bank acknowledged an “adverse” global economic environment that requires careful monetary policy management. The rise in long-term U.S. interest rates has led to tighter global liquidity and a stronger dollar, contributing to inflationary pressures in emerging markets like Brazil.
Daniel Cunha, chief strategist at BGC Liquidez, commented on the uncertainty surrounding the ongoing rate-cutting cycle, stating, “Despite anticipating the next steps of 50 basis points, there appears to be less visibility and confidence regarding the overall extent of the cycle.”
The central bank also pointed to persistent core inflation in various countries and growing geopolitical tensions, particularly after the escalation of the Israel-Palestine conflict. Policymakers reiterated that the extent of the easing cycle will depend on multiple factors, including inflation dynamics and the output gap, highlighting the importance of maintaining stringent policies until the disinflationary process is firmly established and inflation expectations align with targets.
Concerns surrounding President Luiz Inacio Lula da Silva’s commitment to fiscal discipline, as well as uncertainties about the global situation, prompted economists to revise their forecasts for the easing cycle, predicting that rates would end 2024 at 9.25%, an increase from the previous estimate of 9%.
Last week, Lula mentioned that his administration did not need to eliminate its primary budget deficit next year, as proposed in new fiscal rules, emphasizing the significance of public funding for priority projects and infrastructure investments. His remarks negatively impacted local markets and sparked fears of a more substantial increase in Brazil’s public debt.
The central bank, which had already indicated that market skepticism regarding fiscal targets was one reason long-term inflation expectations were not aligning with targets, reiterated the necessity of “firmly pursuing” fiscal objectives.
Policymakers revised their inflation forecast for this year to 4.7%, down from 5.0%, now within the official target range of 3.25% with a 1.5 percentage point tolerance in either direction. However, inflation predictions for 2024 and 2025 have been adjusted upwards to 3.6% and 3.2%, respectively, from earlier estimates of 3.5% and 3.1%. The inflation target for the coming year and beyond remains at 3%, with the same tolerance interval.