Brazil Central Bank Reinforces Cautious View on Fight to Bring Inflation Back to Target

Maria Eloisa Capurro
·3 min read

(Bloomberg) -- Brazil’s central bank reinforced there’s still a long way to go to bring inflation back to target, warning that the El Nino weather pattern may have a bigger impact on food prices than initially thought.

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Core price measures that exclude volatile items like food and energy are easing, along with costs of services, policymakers wrote in the minutes of their Dec. 12-13 meeting, when they lowered the Selic to 11.75% and pledged to maintain the half-point pace of easing at their next meetings.

Still, some sources of disinflation “have been exhausted,” the board wrote. Additionally, the committee said it “slightly raised” the inflationary impact of the El Nino weather phenomenon on food prices.

“There is still a long way to go to anchor expectations and bring inflation back to the target,” board members wrote in the document published on Tuesday. A “contractionary and cautious” monetary policy is still needed to reinforce the current disinflation path, they added.

Brazil policymakers led by Roberto Campos Neto are carrying out a gradual easing cycle that has already shaved two percentage points from borrowing costs since August. Headline inflation eased for the second straight month in November, and closely-watched core measures excluding volatile items like food and energy are also cooling. Central bankers see the improvements as “in line” with their estimates, reinforcing their pledges to act with caution.

“There hasn’t been anything extraordinary” on the inflation outlook, said Campos Neto on Tuesday night at an event in Brasilia organized by a local newspaper. Latest prints of consumer price increases have proved benign and consistent, though converging with policymakers estimates, he said.

Campos Neto added that countries such as Chile and Mexico had recent negative surprises on their inflation outlooks. “We see a benign trajectory” for domestic price pressures, he said. “The next few months will be fundamental to consolidate” the improvement, he added.

In minutes to their latest rate-setting decision, the central bank delivered a more hawkish message in light of the improvement in the global outlook, said Leonardo Costa, an economist at asset manager Asa Investments.

“They see very little to celebrate in the process of domestic disinflation,” he said. “It indicates there is no mechanical relationship between the external scenario and domestic rates.”

Read more: Brazil Cuts Rates by Half-Point, Cues Same Pace Into 2024

Brazilian central bankers have gotten help from an improving global economic environment. US Treasury yields have fallen from a peak, and last week the Federal Reserve signaled odds of its own easing cycle next year.

Several Brazil central bank board members now see better chances of the US economy avoiding a recession despite high borrowing costs.

They also highlighted an uncertain geopolitical context, and signs in advanced economies that point to hot labor markets and a tight output gap. The board will “continue to monitor” the global outlook and its impact on domestic activity, they added.

Most analysts expect annual inflation will ease to 4.49% this month, ending the year within the tolerance range for the first time since 2020. Yet, their estimates for medium-term price increases are proving sticky, with forecasts for 2025 and 2026 holding steady above the 3% target for over five months.

Brazil traders and analysts continue to bet the benchmark Selic will drop to 9.25% in 2024, with half-point reductions at least through May before central bankers slow their pace to quarter-point cuts.

Latin America’s largest economy has puzzled analysts who had expected a recession, instead posting better-than-expected growth most of this year.

Still, recent indicators suggest an economic slowdown is finally taking hold. The services sector shrank by 0.6% in October, its third straight monthly decline.

(Updates with central bank governor comments in sixth paragraph)

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