Brazil to begin easing monetary policy with a small rate cut on Aug 2.
Brazil to begin easing monetary policy with a small rate cut on Aug 2.
Brazil’s Central Bank Poised for Interest Rate Cut
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SAO PAULO, July 28 (ANBLE) – Brazil’s central bank is set to make its first interest rate cut in three years, with most analysts anticipating a small reduction despite calls from the government for more aggressive action. This move comes as inflation cools and economic activity loses steam.
After raising the benchmark rate 1,175 basis points to combat pandemic-driven inflation and shocks in energy and food prices, policymakers have held the interest rate at 13.75% since September 2022, drawing criticism from President Luiz Inacio Lula da Silva.
Now, the bank’s rate-setting committee is expected to reduce rates by 25 basis points when it concludes its next meeting on August 2, according to a poll conducted by ANBLE. The majority of the 46 analysts polled predicted a 25 basis-point cut, while 10 respondents predicted a more aggressive 50 basis-point reduction.
“We believe the initial step will be more cautious, given the ongoing persistence of longer-term inflation dislocation from official targets, elevated core inflation, and the still robust labor market,” said Leonardo Costa, an analyst at ASA Investments.
Contrary to analysts’ expectations, Brazil’s interest rate curve implies a 60% probability for a 50 basis-point cut and a 40% chance of a smaller cut.
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In the minutes from its last policy meeting, the central bank stated that a majority of its policymakers saw room for a “parsimonious” rate cut in August if the inflation outlook improved, while a minority supported a more cautious approach.
The release of favorable inflation data has further divided opinions on the size of the upcoming rate cut, with Finance Minister Fernando Haddad advocating for a more substantial reduction.
Long-term inflation expectations, which have been a concern for the central bank, have fallen since the government decided to keep its annual inflation target at 3% for the coming years. Lula had previously called for higher targets, allowing for looser monetary policy.
Consumer inflation in the 12 months to mid-July slowed to 3.19%, below the central bank’s official target of 3.25% for this year. However, an uptick is expected due to less favorable baseline effects.
Progress in Congress on new fiscal rules and tax reform has also prompted credit rating agency Fitch to raise Brazil’s sovereign credit rating this week. As a result, the country’s five-year Credit Default Swap (CDS) has reached its lowest level in more than two years.
“There would be conditions for a more aggressive rate cut in August, but the central bank, somewhat divided within its board, is likely to opt for a 25 basis-point reduction,” said Julio Hegedus Netto, chief analyst at Mirae Asset.
The bank’s August meeting will be the first to include two of Lula’s nominees to the board. The remaining seven members, including governor Roberto Campos Neto, were chosen by former President Jair Bolsonaro.
All 35 analysts who answered an additional question in the poll predicted another rate cut in September, with over 85% expecting a 50 basis-point reduction.
For the end of 2023, the median expectation of the respondents is a benchmark interest rate of 12.00%, and by the end of next year, the median projection of analysts is for the rate to drop to 9.25%.
