Brazil central bank cuts rates aggressively
Brazil central bank cuts rates aggressively
Brazil’s Central Bank Initiates Rate-Cutting Cycle with Unexpected Aggressiveness
Brazil’s central bank surprised economists on Wednesday when it announced a larger-than-expected cut to its benchmark interest rate. The move, which reduced the Selic policy rate by 50 basis points to 13.25%, is seen as a reflection of the bank’s improving inflation outlook and its desire to stimulate economic growth.
The decision, made by the bank’s rate-setting committee Copom, caught many analysts off guard. Only 10 out of the 46 analysts surveyed by ANBLE had anticipated a 50 basis point reduction, with the majority expecting a smaller cut of 25 basis points. This unexpected move marks Brazil’s first interest rate cut in three years, following a period of holding borrowing costs steady and raising interest rates by a staggering 1,175 basis points to combat inflation.
However, the divided nature of the policy decision does not dampen the central bank’s confidence in further rate reductions in the coming months. In its policy statement, Copom signaled a shared outlook among committee members, stating, “If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings,” demonstrating the bank’s commitment to keeping inflation under control.
The relatively dovish tone of the statement has surprised some economists. William Jackson, chief emerging markets ANBLE at Capital Economic, noted that “policymakers’ inflation concerns are dissipating more quickly than we’d anticipated,” leading him to revise his year-end Selic forecast to 11.75%, down from his previous projection of 12.50%.
The rate decision itself highlighted a split among board members. Five votes were in favor of the 50-basis-point cut, while four votes favored a more modest reduction of 25 basis points. This was the first policy meeting to include two nominees from President Luiz Inacio Lula da Silva, who joined central bank chief Roberto Campos Neto in voting for the more aggressive rate cut. This move is significant, as Lula had publicly criticized Campos Neto for keeping borrowing costs stable despite falling inflation.
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Following the announcement, Finance Minister Fernando Haddad praised Campos Neto for his openness to dialogue and expressed his optimism for “harmony” between fiscal and monetary policy. Lula’s leftist government has been taking steps to ease investor concerns, including introducing new fiscal rules in Congress and implementing a landmark reform on consumption taxes. These efforts have been recognized by Fitch Ratings, who recently upgraded Brazil’s sovereign rating.
Several factors have contributed to the decline in consumer inflation in Brazil. These include cooling economic activity, a stronger exchange rate, and the implementation of new fiscal measures. As a result, consumer inflation for the 12 months leading up to mid-July was at 3.19%, below the central bank’s official target of 3.25% for the year. However, it is anticipated that inflation will pick up in the second half of the year due to less favorable base effects.
In response to these factors, Copom updated its inflation projection for 2023, lowering it to 4.9% from the previous estimate of 5.0% in June. The central bank stated that its rate cuts are consistent with its strategy to bring inflation down to its target over the relevant horizon for monetary policy, which now includes 2024 and 2025, to a lesser extent. The inflation targets for these years are 3%, and policymakers anticipate consumer prices rising by 3.4% in 2024 and 3.0% in 2025.
Overall, Brazil’s central bank’s decision to initiate a more aggressive rate-cutting cycle demonstrates its commitment to balancing inflation control with economic growth. With a positive outlook for inflation and promising economic reforms, Brazil’s monetary policy is poised to stimulate economic activity and foster investor confidence in the country’s financial stability.
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