Brazil Central Bank Deliver Third 50bps Rate Cut in a Row to 12.25%

Banco Central do Brasil​ cut the Selic rate 50bps to 12.25% at its November meeting in line with market expectations. It was the third half a percentage point cut in a row and signaled it will keep the same pace of monetary easing at least through year’s end. Brazil’s central bank repeated forward guidance that says “If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings….” The move follows the Federal Reserve’s decision earlier on Wednesday to leave its benchmark interest rate unchanged while signaling borrowing costs will likely stay higher for longer after one more hike this year.

Brazil Real
Brazilian Real

“If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings, and judge that this pace is appropriate to keep the necessary contractionary monetary policy for the disinflationary process.,” board members wrote in a statement accompanying their decision.

The central bank’s next decision is in December.

The Central Bank last year aggressively hiked its benchmark interest rate with twelve consecutive interest rate hikes since 2021 when the bank began its current tightening cycle early last year, the Selic was at a record low 2%. The lending rate is now at its highest level since 2017.

Highlights

  • The bank lowered the Selic to 12.25% late on Wednesday.
  • The decision was in line with the bank’s prior guidance, which policymakers maintained unchanged.
  • Result was a unanimous decision.
  • The move was expected.
  • If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings, and judge that this pace is appropriate to keep the necessary contractionary monetary policy for the disinflationary process.
  • Headline consumer inflation remains in a path of disinflation but continues to be above the tolerance interval around the target, while various measures of underlying inflation remain above the inflation target.
  • Inflation expectations for 2023, 2024, and 2025 collected by the Focus survey are around 4.6%, 3.9%, and 3.5%, respectively.
  • Copom’s inflation projections in the reference scenario* stand at 4.7% for 2023, 3.6% for 2024, and 3.2% for 2025.
  • Inflation projections for administered prices are 9.3% for 2023, 5.0% for 2024, and 3.6% for 2025.
Brazil Interest Rate
Brazil Interest Rates

Brazilian Congress is debating a tax reform as well as bills aimed at increasing public revenues as the administration pledges to eliminate next year the primary budget deficit, which doesn’t take into account interest payments.

“Given the importance of the execution of the fiscal targets already established for the anchoring of inflation expectations, and hence for the conduct of monetary policy, the Committee reinforces the importance of firmly pursuing those targets,” central bankers wrote in the statement.

After peaking at more than 12% in 2022, Brazil’s annual inflation now stands at 4.61%. Policymakers target price growth of 3.25% in 2023 and then 3% through 2026, with tolerance of plus or minus 1.5 percentage points.

Brazil’s economic growth during the first half of the year was, boosted by a strong harvest, demand for services and a firm labor market. Analysts have continued to raise estimates for 2023, with activity now seen expanding near the 3.2% forecast by the government.


Banco Central Do Brasil Comitê de Política Monetária (Copom)

Monetary Policy Statement November 1, 2023

Copom reduces the Selic rate to 12.25% p.a.

The global environment is adverse, due to an increase in longer-term interest rates in the United States, the persistence of high core inflation in many countries, and new geopolitical tensions. The central banks of major economies remain committed to bringing inflation back to its targets in an environment characterized by labor market pressures. The Committee judges that the environment requires attention and caution from emerging market economies.

Regarding the domestic scenario, the set of indicators on economic activity remains consistent with the scenario of deceleration over the next quarters expected by Copom. Headline consumer inflation remains in a path of disinflation, but continues to be above the tolerance interval around the target, while various measures of underlying inflation remain above the inflation target.

Inflation expectations for 2023, 2024, and 2025 collected by the Focus survey are around 4.6%, 3.9%, and 3.5%, respectively.

Copom’s inflation projections in the reference scenario* stand at 4.7% for 2023, 3.6% for 2024, and 3.2% for 2025. Inflation projections for administered prices are 9.3% for 2023, 5.0% for 2024, and 3.6% for 2025.

The Committee emphasizes that risks to its scenarios remain in both directions. Among the upside risks for the inflationary scenario and inflation expectations, it should be emphasized (i) a greater persistence of global inflationary pressures; and (ii) a stronger-than-expected resilience of services inflation due to a tighter output gap. Among the downside risks, it should be noted (i) a greater-than-projected deceleration of global economic activity; and (ii) an impact on global inflation larger than expected from synchronized monetary policy tightening. In light of the international environment, the Committee judges that the current conjuncture is more uncertain than usual and requires caution on the conduct of monetary policy.

Given the importance of the execution of the fiscal targets already established for the anchoring of inflation expectations, and hence for the conduct of monetary policy, the Committee reaffirms the importance of firmly pursuing those targets.

Considering the evolution of the disinflationary process, the assessed scenarios, the balance of risks, and the broad array of available information, Copom decided to reduce the Selic rate by 0.50 percentage point, to 12.25% p.a., and judges that this decision is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon for monetary policy, which includes 2024 and 2025. Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing economic fluctuations and fostering full employment.

The current context, characterized by a stage in which the disinflationary process tends to be slower, with only partial reanchoring of inflation expectations and a challenging global outlook, requires serenity and moderation in the conduct of monetary policy. The Committee reinforces the need to persist on a contractionary monetary policy until the disinflationary process consolidates and inflation expectations anchor around its targets.

If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings, and judge that this pace is appropriate to keep the necessary contractionary monetary policy for the disinflationary process. The Committee emphasizes that the total magnitude of the easing cycle throughout time will depend on the inflation dynamics, especially the components that are more sensitive to monetary policy and economic activity, on inflation expectations, in particular the longer-term ones, on its inflation projections, on the output gap, and on the balance of risks.

The following members of the Committee voted for a reduction of 0.50 percentage point: Roberto de Oliveira Campos Neto (Governor), Ailton de Aquino Santos, Carolina de Assis Barros, Diogo Abry Guillen, Fernanda Magalhães Rumenos Guardado, Gabriel Muricca Galípolo, Maurício Costa de Moura, Otávio Ribeiro Damaso and Renato Dias de Brito Gomes.

  • In the reference scenario, the interest rate path is extracted from the Focus survey, and the exchange rate starts at USD/BRL 5.00 and evolves according to the purchasing power parity (PPP). The Committee assumes that oil prices follow approximately the futures market curve for the following six months and then start increasing 2% per year onwards. Moreover, the energy flag is assumed to be “green” in December 2023, 2024, and 2025. The value for the exchange rate was obtained according to the procedure of rounding the average USD/BRL exchange rate observed on the ten business days ending on the last day of the week before the Copom meeting, as it was announced in the Inflation Report of September 2023.

Note: This press release represents the Copom’s best effort to provide an English version of its policy statement. In case of any inconsistency, the original version in Portuguese prevails.

Source: Banco Central Do Brasil

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