-Brazil’s central bank cut its key interest rate by half a percentage point and cued more reductions of the same size into 2024 as inflation eases toward target while the global economic outlook improves.
Policymakers led by Roberto Campos Neto lowered the Selic to 11.75% late on Wednesday as expected by all analysts in a Bloomberg survey. Board members have now reduced borrowing costs by 2 percentage points since August.
In a statement accompanying the decision, policymakers wrote that headline inflation continues to slow down. At the same time, several measures of core prices that exclude volatile items like food and energy are closer to target.
“If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings,” board members wrote, repeating the guidance given at their previous decision.
Brazil central bankers are forging ahead with plans to ease monetary policy with “serenity” and “moderation” as annual inflation is seen ending the year within the target range for the first time since 2020. At the same time, economic activity is slowing, and falling US Treasury yields have reduced pressure on the real, thus mitigating possible cost-of-living threats.
Less Adverse
Brazil’s announcement came hours after the Federal Reserve held interest rates steady for a third meeting and gave its clearest signal yet that its aggressive hiking campaign is finished by forecasting a series of cuts next year.
In their statement, Brazil central bankers wrote that the global economy is less adverse than in their previous meeting. They cited falling long-term interest rates in the US and incipient signs of lower core inflation in some countries.
At the same time, “the Committee judges that the environment continues to require caution from emerging market economies,” policymakers wrote.
“This was a hawkish statement for financial markets, particularly after the reaction that we saw from the Federal Reserve, which was especially dovish,” said Natalie Victal, chief economist at SulAmerica Investimentos. “It’s a statement that keeps a high bar to accelerating the pace of easing.”
No Hurry
Locally, Latin America’s largest economy has remained largely resilient to high rates. Gross domestic product unexpectedly grew in the third quarter on strong family consumption, low unemployment and higher government spending.
Still, recent gauges of activity point to a slowdown in the final months of the year. The services sector shrank by 0.6% in October, marking the third straight monthly decline, the national statistics agency reported earlier Wednesday.
“Regarding the domestic scenario, the set of indicators on economic activity remains consistent with the scenario of deceleration expected by Copom,” central bankers wrote in their statement.
Policymakers also face lingering uncertainty on the government’s fiscal plans. With Congress nearing recess, Finance Minister Fernando Haddad is working against the clock with legislators to approve bills that would raise public revenue — a condition for the government to deliver on the pledge to eliminate next year its primary fiscal deficit, which excludes interest payments.
Brazil’s annual inflation eased to 4.68% in November. By comparison, starting next year policymakers will target price growth at 3%, with a tolerance range of plus or minus 1.5 percentage points.
In their statement, board members reiterated that fiscal targets are key in anchoring consumer price expectations, and that Brazil’s disinflation process has been slow. Still, some analysts are betting on an even longer easing cycle.
“The statement shows a Copom that’s convinced it has a lot of space to keep cutting rates,” said Caio Megale, chief economist at XP Investimentos. “But, they aren’t in a hurry and don’t have the need to cut more quickly now. They prefer to act with more certainty.”
