By Brazil’s central bank signalled it is ready to start reducing interest rates in March but insisted borrowing must remain expensive and decision-making regarding the magnitude and length of the easing cycle must be gradual, based on incoming macroeconomic data.
Policymakers maintained the benchmark Selic rate at 15% for the fifth straight time, and the guidance was outlined in the minutes of the bank’s most recent policy meeting.
The minutes state that recent changes in inflation and expectations have made it more evident that monetary policy is having the desired effect.
The central bank, which has already stemmed the tide of current inflation, said that market expectations of current inflation have been brought “relatively closer” to the official 3% target.
These trends give policymakers the ability to signal the shift from a tightening to easing cycle at their next meeting, which would make a turning point after a long period of tighter monetary conditions.
Adherence to restricted rates
The bank stated that any easing will be cautious despite the hint of impending cuts.
Until the disinflation process is solidly consolidated and inflation expectations are anchored at the goal, policymakers unanimously reiterated the necessity of keeping interest rates at restrictive levels.
Underlying pressures on prices are still strong, the minutes emphasised.
The central bank specifically cited the labour market’s ongoing dynamism as a factor putting pressure on both present inflation and anticipated future pricing.
Policymakers argued that this resilience opposes a quick or drastic cut in borrowing costs.
Even as it is ready to shift toward a more accommodating attitude, the bank’s focus on upholding restrictive conditions highlights its desire to prevent damaging the gains made in bringing inflation closer to target.
Inflation outlook and expectations
The central bank’s weekly survey of economists yielded the most recent inflation forecasts, which were also cited in the minutes.
According to such projections, inflation will reach 3.99% this year and 3.80% in 2027. Expectations are 3.50% for 2028 and 2029.
These forecasts show a slow approach to the 3% objective, but they also imply that inflation is likely to be above target for several years.
The bank’s message that the easing cycle will be carefully calibrated and sensitive to fresh information is reinforced by this projection.
Data-dependent approach
The central bank reiterated that the speed and extent of future interest rate reductions will be data-dependent.
It says this strategy is appropriate for the environment now, where persistent signals of the ebbing of economic activity tend to cloud the inflation trend.
The trend is clouded by uncertainty over how slowing activity will affect prices, and as a result, a cautious, data-focused approach is needed, the minutes said.
This position allows for flexibility as policymakers wait to see how the economy and inflation develop over the next few months.
The guidance comes as markets split between traders favouring either a 25 or 50-basis-point cut at the first cut. The bank provided no specific guidance on the size of the first hike, reiterating its insistence on conditionality.
The background of the previous tightening
A period of vigorous monetary tightening is followed by the expected transition toward ease. After increasing the benchmark rate by a total of 450 basis points, the central bank ended its rate-hiking cycle in July.
In an attempt to curb economic activity in the biggest economy in Latin America, it has maintained stable rates ever since.
However, that cooling has taken a while to manifest.
According to the minutes, President Luiz Inácio Lula da Silva’s government stimulus programs have helped to maintain activity, making it more difficult for the central bank to significantly reduce inflation.
Because of this, the bank’s message is still one of caution, emphasising that easing will only go as far and as quickly as the data permit, even though the signal of rate decreases represents a noticeable shift in tone.
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