Brazil’s central bank will likely hold its interest rate steady for the sixth straight meeting on Wednesday, as congress prepares to debate President Luiz Inacio Lula da Silva’s proposal to manage public finances and tame debt.
(Bloomberg) — Brazil’s central bank will likely hold its interest rate steady for the sixth straight meeting on Wednesday, as congress prepares to debate President Luiz Inacio Lula da Silva’s proposal to manage public finances and tame debt.
All but one economist in a Bloomberg survey expect board members to keep the benchmark Selic unchanged at 13.75%, while the remaining analyst sees a quarter-point cut to 13.5%. Policymakers led by Roberto Campos Neto have held rates steady since September, after an aggressive tightening cycle that added 11.75 percentage points to borrowing costs.
Brazil’s annual inflation has eased to the lowest since 2020, intensifying a months-long public debate over the convenience of such restrictive monetary policy. In his first four months in power, Lula has repeatedly attacked the central bank, saying high borrowing costs fan unemployment. His increased pressure spilled over to two recent congressional hearings where Campos Neto defended policymakers’ views, saying core gauges that strip out volatile items are still running hot.
What Bloomberg Economics Says
“A key question is whether the government’s fiscal framework proposal prompts policymakers to adopt a less hawkish tone in their post-meeting statement. We think it will.”
— Adriana Dupita, Latin American economist
— Click here for the full report
Wednesday’s rate meeting will take place a few hours after the Federal Reserve likely extends its tightening cycle with another quarter-of-a-point increase. Brazil’s decision will be published on the central bank’s website after 6:30 p.m. in Brasilia with a statement from its board.
Here’s what to look out for:
Inflation Target
Central bankers will likely stop short of signaling the start of easing, as their own inflation estimates remain above target for this year and next. On top of that, their forecasts are expected to be little changed from the March decision.
Consumer price increases eased to 4.16% in early-April, falling within the central bank’s tolerance range. Still, as the impact of three months of deflation following last year’s tax cuts fades away, analysts see cost-of-living increases picking up again to 6.05% by December.
“What we saw is misleading, since it’s still artificially contaminated by tax cuts,” said Leonardo Porto, Brazil economist at Citigroup Inc., referring to the most recent consumer price report. He estimates core inflation remains at around 5%-6%. “That’s still very high,” considering central bank targets of 3.25% for this year and 3% next, he said.
Campos Neto has justified the need to hold rates steady, telling lawmakers last week that any changes in the Selic need to be done with “credibility.”
Read More: Brazil Central Banker Holds Firm on Rate Amid Congress Grilling
“The best strategy is to keep a hawkish tone, to bring inflation expectations back to target,” said Mirella Hirakawa, an economist at asset manager AZ Quest Investimentos Ltda.
The board’s pledge to “not hesitate” to resume key rate hikes if needed is likely to appear again, though the wording could be toned down, Hirakawa said. Some members of Lula’s government have interpreted that vow as a threat.
Fiscal Outlook
Central bankers could highlight Finance Minister Fernando Haddad’s efforts for greater clarity on public spending and the new fiscal framework that was sent to Congress. Those factors are likely to represent the most meaningful changes in policymakers’ balance of risks.
Still, with lawmakers only expected to schedule initial votes on the bill for late next week, central bankers are unlikely to change their guidance before the legislation secures final approval.
“There’s no mechanical relationship with monetary policy, as the bill hasn’t been approved,” said Mauricio Oreng, head of economic research Banco Santander SA.
Read More: Brazil Finance Chief’s Market-Friendly Pose Alienates the Left
Global Tightening
Analysts are likely to dig into central bank comments on global financial conditions, including signs of a possible pause in the US tightening cycle, as well as figures on domestic growth and credit flows.
–With assistance from Giovanna Serafim.
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