To no one’s surprise, the Brazilian Central Bank’s Monetary Policy Committee has reduced the country’s benchmark interest rate by half a percentage point to 12.25 percent. This is the third consecutive half-point cut.
The Central Bank has decided to stay the course on monetary easing despite recent noise about the government’s commitment to its self-imposed fiscal targets.
In 2024, the Luiz Inácio Lula da Silva administration is supposed to bring the public deficit to zero (with a tolerance band of 0.25 percent of GDP). But the president himself said last week that this will be a tall order — and Congress is eager to approve looser fiscal rules. Economists say more spending leeway could hinder lawmakers’ willingness to pass a bolder tax reform.
Most analysts believed that the zero-deficit goal would be elusive (as columnist Luciano Sobral pointed out back in April, fiscal targets can only be achieved under rosy macroeconomic conditions), especially now that federal revenues are down. But moving the fiscal goalposts also means that the government will escape the penalties for higher deficits that the fiscal framework would trigger, essentially neutering the framework altogether.
The Monetary Policy Committee embedded in its statement a warning about the risks of the government abandoning its fiscal goals. “Taking into account the importance of implementing the fiscal targets already established for anchoring inflation expectations and, consequently, for the conduct of monetary policy, the Committee reaffirms the importance of firmly pursuing these targets.”
Fiscal concerns aside, current macroeconomic conditions suggest a soft-landing scenario and favor rate cuts. “We see domestic inflation in a benign trend, alongside slowing growth and mild long-term inflation expectations — stable at 3.5 percent,” said João Savignon, head of research at brokerage Kinitro Capital, speaking to The Brazilian Report.
While consumer prices are not rising at the pace they were between 2021 and 2022, economists still warn that the inflation scenario inspires caution — especially due to the seasonal increase in food and fuel prices expected for the end of the year and a fiscal policy that remains expansionary.
From January to September 2023, the Brazilian federal government posted an inflation-adjusted primary deficit of BRL 92.6 billion (USD 18.4 billion), marking the largest fiscal shortfall since the peak of the pandemic.
While markets expect another half-point cut for the next policy meeting in mid-December and more cuts next year, markets raised the median forecast for the 2024 year-end from 9 to 9.25 percent.
Although small, the increase reflects analysts’ concerns about the deterioration of the foreign scenario, dictated by the extension of monetary tightening in the U.S. for longer than expected. Hours before the Brazilian Central Bank announced its policy decision, the U.S. Federal Reserve left interest rates at 5.25 to 5.5 percent, but it did not rule out another hike in 2023.
When American rates are high, the dollar grows stronger because Treasury yields become more attractive.
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