Brazil’s Central Bank Warns of Prolonged Tightening Cycle as Inflation Fears Persist
Brazil’s central bank has issued a stark warning about the potential for a more protracted tightening cycle, highlighting the growing concern over inflation expectations, just days after policymakers doubled the pace of their interest rate hikes, Bloomberg reports.
In minutes released on Tuesday from their November 5-6 meeting, where the benchmark Selic rate was raised by 50 basis points to 11.25%, central bankers expressed their “discomfort” with inflation estimates remaining above their 3% target. They described the short-term outlook as “more challenging” and emphasized the crucial role of “anchoring expectations” in stabilizing inflation.
The bank’s concerns stem from a confluence of factors pushing inflation higher, including a robust economy, a tight labor market, and rising consumer price forecasts. The Lula administration’s expansion of public transfers and minimum wage increases have fueled household consumption, further stoking investor worries about fiscal policy and weakening the real.
The minutes detail how investors’ perception of worsening public accounts has significantly impacted asset prices and inflation expectations. Policymakers underscored the importance of stabilizing public debt and defended the need for structural spending cuts. They emphasized that countercyclical monetary and fiscal policies are essential for price stability.
“The reduction of spending growth, especially in a more structural way, could even induce economic growth in the medium term,” the minutes noted, emphasizing the need for “sustainable fiscal rules.”
President Lula has acknowledged the need for spending cuts and has been engaged in discussions with his ministers to regain investor confidence. However, these proposals, while advanced, have been delayed due to the president’s indecision and are expected to be included in a constitutional amendment and complementary bill requiring Congressional approval.
October’s inflation rate accelerated to 4.76%, exceeding the central bank’s tolerance range. Energy and meat prices continue to climb, exacerbated by severe weather events. Policymakers anticipate consumer price growth of 4.6% next month.
Despite a slight dip in retail sales in September, the bank views overall inflation risks as tilted to the upside, with concerns over food prices, a weaker currency impacting industrial goods, and service costs remaining above target. The minutes indicate an interruption in the disinflationary process.
Traders are anticipating borrowing costs to rise to near 14% by mid-2025, while Wall Street banks have also raised their estimates for the end-of-cycle Selic following the recent rate announcement. While refraining from providing specific guidance on future rate moves, policymakers emphasized a “firm commitment” to controlling inflation.
The central bank also acknowledged the “challenging” global economic and geopolitical environment, noting that the increased uncertainty and volatility necessitate caution in domestic monetary policy.
