As expected by many analysts, the Central Bank’s Monetary Policy Committee today decided to cut the country’s benchmark interest rate by another half percentage point, while slightly changing the tone of its communication to the market.
Whenever the committee makes a decision, there are at least three aspects that can change: trend (moving the benchmark interest rate up or down depending on inflation and other factors), intensity (defining the pace of changes), and forward guidance (signaling what it intends to do in the future).
The latter is usually where action is taken first, with one goal: to influence market expectations about inflation if the committee understands they are not anchored — in economic parlance, this means projections that vary considerably within an 18-month window.
“Projections of around 3.5 percent for all horizons until 2027, according to the Central Bank’s Focus report, show that there is a lack of confidence in the market and that expectations need to be re-anchored,” Álvaro Frasson, economist and macro strategist at BTG Pactual, tells The Brazilian Report.
He expected the committee to be straightforward in its communication, removing the plural from the guiding part and not foreseeing further cuts of half a percentage point in future meetings. “It was necessary to do this in the face of at least four months of signs of stronger economic activity.” That’s exactly what happened. The committee said that the baseline scenario has not changed substantially, allowing it to “anticipate a reduction of the same magnitude at the next meeting.”
As Alberto Ramos, Goldman Sachs’ lead economist for Latin America, pointed out, “tweaking the guidance gives the Central Bank extra freedom to calibrate the pace of easing given a still complex domestic inflation backdrop and an uncertain external environment.”
In recent weeks, several members of the Monetary Policy Committee, including the Central Bank’s chairman, Roberto Campos Neto, had spoken of a slower disinflationary pace, both domestically and externally, driven by a resilient labor market in Brazil and the U.S., among other factors.
As the committee itself has described many times,...
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