Bloomberg — Brazil’s central bank said it may be able to cut interest rates at its next meeting if the current inflation slowdown continues, as top executives and the government push for clear signs of an easing cycle.
Policymakers said there was divergence on how far they could go toward signaling chances of imminent easing, according to the minutes to their June 21 rate decision, when they held borrowing costs at 13.75% for the seventh straight time. A group of board members was “more cautious” and pointed to the need for inflation estimates to ease further and “accumulate more evidence” of lower price pressures.
“The prevailing assessment was that the continuation of the ongoing disinflationary process, with its consequent impact on expectations, may allow the necessary confidence to be built up to start a parsimonious process of inflection at the next meeting,” central bankers wrote in the minutes published Tuesday. Copom, as the board is known, warned that “premature” rate cuts could accelerate inflation, hurting the monetary authority’s credibility and financial conditions.
“There’s consensus on delivering rate cuts in August,” said Leonardo Costa, economist at asset management Asa Investments, who previously expected an easing cycle beginning only next year. “We now believe they will begin fairly gradually, with a 25-basis-point cut” at their next rate-setting meeting.
What Bloomberg Economics Says: The minutes of the Brazilian central bank’s June meeting brought mildly dovish messages — a response to political criticism for another rate hold, in our view. They suggest an August cut is on the table, especially if the National Monetary Council maintains a 3% inflation target for the coming years at its June 29 meeting. — Adriana Dupita, Brazil and Argentina economist
Swap rates on the contract due in January 2024, which indicate investor sentiment toward monetary policy, fell 4 basis points in morning trading. Prior to the release of the minutes, traders were already pricing in a quarter-point rate cut in August.
Brazil’s monetary authority was among the first to hike interest rates in the wake of the pandemic, but policymakers led by bank chief Roberto Campos Neto say “patience and serenity” are still needed to assess their next steps. After more than nine months of holding rates steady at a six-year high, credit flows are freezing for small and medium companies, retail sales are slowing down, auto purchases have all but stalled and industrial production is falling.
Annual Inflation
President Luiz Inacio Lula da Silva has publicly criticized monetary policy since taking office in January, as interest rates remain an obstacle to economic growth. Top cabinet members have echoed his criticism, and key business leaders are now joining his public demands for immediate cuts.
Annual inflation in early June slowed to its lowest level since September 2020, helped by drops in transportation and food costs, the national statistics institute reported in a separate release on Tuesday. Consumer prices rose 3.4% from a year prior, just above the median estimate of a 3.38% gain from analysts in a Bloomberg survey. Monthly inflation stood at 0.04%.
In their minutes, central bankers reiterated the cost-of-living slowdown is more gradual than expected. Their next steps will be based on “inflationary dynamics” like long-term consumer price estimates and measures of economic slack.
Estimates of future price increases “declined slightly” but remain above the monetary authority’s goal, requiring “parsimony and caution in the conduct of monetary policy,” board members wrote.
Resilient Activity
Latin America’s largest economy is showing mixed signals, with stronger agriculture production while other sectors grow modestly, policymakers wrote in their minutes. With more resilient activity, central bankers raised their estimates for neutral rates, which neither stimulate nor restrict the economy, to 4.5% from 4% previously.
“They are opening the door slowly, cautiously, given the uncertainty that remains around inflation targets,” said Cristiano Oliveira, chief economist at Banco Pine. “If current 3% goals are kept unchanged, rate cuts will begin in August.”
Investors are awaiting a decision on long-term inflation targets later this week, when Campos Neto, Finance Minister Fernando Haddad and Planning Minister Simone Tebet will meet to set the goal for 2026. “Decisions that induce the reanchoring of expectations and that raise confidence in inflation targets would contribute to a faster and less costly disinflation process, allowing monetary easing,” central bankers wrote in their minutes.
Lula’s first two picks for the bank’s board are likely to participate in August’s rate decision meeting, with former deputy finance minister Gabriel Galipolo considered an advocate for lower borrowing costs.
--With assistance from Andrew Rosati, Giovanna Serafim and Josue Leonel.
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