The Central Bank’s Monetary Policy Committee on Tuesday published the minutes of last week’s policy meeting, when it cut, for the third straight time, Brazil’s benchmark interest rate by a half percentage point — bringing it to 12.25 percent.
The committee highlighted the “benign evolution” of current inflation trends, which allows it to anticipate “further reductions of the same magnitude in the next meetings” if the economic scenario evolves as expected.
Higher interest rates are a common strategy by central banks to tame inflation by cooling off the economy. In that sense, the Brazilian monetary authority has been successful in its pursuit.
After surprising growth results in the first half of the year, the economy is decelerating — especially sectors that are more sensitive to credit (such as the sales of durable goods). And inflation has been much more manageable than a year ago.
However, the Central Bank also stressed that the global scenario is getting more daunting for Brazil “due to an increase in longer-term interest rates in the U.S., the persistence of high core inflation in many countries, and new geopolitical tensions.”
As The Brazilian Report has explained, higher interest rates in the U.S. impact Brazil (and other emerging economies, for that matter) in multiple ways. One is making riskier assets less appealing to investors, given that they can get higher yields from U.S. Treasury bonds, which are considered as safe of an investment as it gets.
The other comes through exchange rates, as the heightened interest for Treasury bonds makes the U.S. dollar stronger. That impacts fuel prices, making transportation costs higher — and having ripple effects on production chains.
Just as it did last week, the Central Bank warned the government about how important it is for the Luiz Inácio Lula da Silva administration to seek the fiscal goals it set for itself under the new fiscal framework. In recent weeks, the president and Congress have been loosey-goosey when discussing primary fiscal targets for 2024.
The committee “reinforced its view that the lack of commitment to structural reforms and fiscal discipline, the increase of earmarked credit granting, and the uncertainties about the stabilization of the public debt have the potential to raise the neutral interest rate of the economy, with harmful impacts on the power of monetary policy and, consequently, on the cost of disinflation in terms of activity.”
For economist and independent consultant André Perfeito, the minutes make it clear that the pace of rate cuts will slow down next year. He believes that the 9.25 percent current median 2024-end forecast for the benchmark interest rate is too low. He believes the rate will end next year at 10.75 percent.
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