Brazil to Keep Half-Point Pace of Interest Rate Cuts for Now

Maria Eloisa Capurro
·3 min read
  • Oops!
    Something went wrong.
    Please try again later.

(Bloomberg) -- Brazil’s central bank is widely expected to deliver a sixth consecutive cut of half a percentage point to its key interest rate, potentially signaling it may soon reduce the pace of monetary easing as inflation risks grow.

Most Read from Bloomberg

All analysts surveyed by Bloomberg see the benchmark Selic falling to 10.75% after markets close on Wednesday, a move that would be in line with central bank guidance and also extend a cycle that’s already reduced borrowing costs by 2.5 percentage points since August.

Traders in the local swaps market are betting it could be one of the last rate cuts of that size, with quarter-point reductions starting in June.

Policymakers led by Roberto Campos Neto are relaxing monetary policy gradually as annual inflation inches closer to the 3% goal. Still, rising services costs are prompting analyst concern, while the labor market remains tight and President Luiz Inacio Lula da Silva pressures for more public spending. Expectations for consumer price increases remain above target through 2026.

What Bloomberg Economics Says

Rising uncertainty about underlying inflation and the rate path in advanced economies warrant an adjustment in forward guidance, in our view. We think the BCB will continue to signal a 50-bp cut in May, but may refrain from committing to another in June.

— Adriana Dupita, Brazil and Argentina economist

— Click here for full report

The meeting will come hours after the Federal Reserve’s announces its own monetary policy decision, likely keeping rates steady at 5.25% to 5.5% for a fifth consecutive meeting. An initial reduction in Fed rates is currently expected for June.

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 for:

Future Steps

Until now, Brazilian central bankers have committed to delivering half-point cuts in their “next meetings,” clarifying that they have enough visibility for the two subsequent monetary policy decisions.

But with inflation becoming harder to tame, analysts at banks including JPMorgan Chase & Co and Citigroup say the monetary authority could provide guidance only as far as the next gathering in May.

Prices of staple foods like rice and beans are soaring as severe weather continues to hurt production. Services costs are also picking up, with concerns over whether real wage gains are fueling inflation pressures.

While economists see the Selic rate falling to 9% by December, those estimates could rise if central bankers modify their guidance this week. “Investors will read it as higher chances of a two-digit Selic rate,” Natalie Victal, chief economist at SulAmerica Investimentos, said regarding a possible guidance change.

The central bank has so far refrained from indicating what terminal rate they seek, and some economists say it still has a ways to go with easing. “There’s still plenty of space for rate drops, because they’ve relaxed monetary policy very modestly so far,” said Tatiana Pinheiro, chief economist at Galapagos Capital Invest.

Spending Boost

Uncertainty over public spending is coming to the forefront as Lula pushes his cabinet for greater outlays to combat both declining popularity and waning economic growth.

“There’s an expansionist bias on this government’s fiscal policy,” said Caio Megale, chief economist at XP Investimentos.

Higher spending could pressure policymakers to end their easing cycle sooner than financial markets expect to avoid having inflation drift away from target. Central bankers could reiterate the need to shore up public finances, backing Finance Minister Fernando Haddad’s efforts to eliminate this year’s primary deficit, which excludes interest payments.

Fed Concerns

Policymakers are expected to comment on global monetary policy — including chances of a later start US monetary easing cycle.

Economists say that Fed rates, if unchanged at the current levels, may soon pose an obstacle for additional monetary easing in Brazil and other Latin American nations.

--With assistance from Giovanna Serafim.

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.