Brazil halts interest rates cuts after uptick in inflation, more easing not until 2025 – analysts

Jonathan Lopez


SAO PAULO (ICIS)–This week, Brazil entered its own higher-for-longer period for interest rates as an uptick in prices as of late prompted the central bank to pause monetary policy easing, leaving the Selic main benchmark at 10.50%.

Just a few weeks ago, Brazilian businesses and households were hoping the pace of monetary easing would slow down to quarter-point cuts, instead of the initial half-point cuts, but late on Wednesday the central bank said the easing is over – for now.

The central bank’s monetary policy committee (Copom) decided to keep the Selic unchanged in its June meeting, after falling more than three percentage points since August, when the Selic stood at 13.75%.

Brazil’s annual rate of inflation in May stood at 3.93%, partly because of the floods in Rio Grande do Sul, up from April’s 3.69%. Brazil’s central bank has the mandate to keep inflation at around 3%.

The latest survey among economists published by the Banco Central do Brasil every week already showed sharply higher expectations for both inflation and rates.

The market is hoping for the best after the flooding, but fearing the worst. The first signs were indeed worrying: manufacturing sharply slowed down from April in what had been a healthy start to 2024, while output in sectors such as automotive fell by 25% in May, month on month.

Analysts have already warned growth in Q2 will be far from the healthy 0.8% GDP rise in Q1.

Moreover, those who are lobbying for lower rates got a second jar of cold water: Copom’s decision to keep rates was unanimous.

In past meetings, those members appointed by President Luiz Inacio Lula da Silva tended to favor the half percentage cuts, with their ears more prone to listen to industrial players – including the chemicals industry – who keep identifying rates as a burden for growth.

Those Copom members appointed by the previous Jair Bolsonaro Administration tended to favor smaller rate cuts.

However, a 10.50% official Selic rate can end up being much higher. The automotive industry’s trade group Anfavea has been one of the most vocal about this, arguing the final interest rates consumers can end up paying when purchasing a car can be around 20-30%.

In a country where even the smaller purchases can be paid in several installments, with added interest rates, the Selic matters to everyone, not least those with low salaries who can only get by indebting themselves to pay for some of their daily spending.

In its statement late on Wednesday, Copom also turned sour and painted a worrying global and domestic outlook.

Public disagreements between the government and the central bank as of late may not have helped the cabinet in their pursuit for lower rates either.

A few days ago, Lula even said the governor, Roberto Campos Neto, has a political side, effectively questioning his mandate as per the supposed sacrosanct central bank independence.

Some press reports have said Campos may consider running in the future as a candidate from the center-right bloc. In Brazilian political life, everything is possible.

Meanwhile, the Brazilian real (R) has depreciated considerably in the past two months. In the past two weeks, public and contradictory statements about the cabinet’s intentions on running – or not – a public deficit took its toll as investors always keep an eye on higher taxes if spending goes up.

“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 a greater persistence of global inflationary pressures; and a stronger-than-expected resilience of services inflation due to a tighter output gap,” said Copom.

“The current context, characterized by a stage in which the disinflationary process tends to be slower, further de-anchoring of inflation expectations, and a challenging global outlook, requires serenity and moderation in the conduct of monetary policy.”

In summary, higher interest rates for longer may put yet more stones on Brazil’s manufacturing recovery after a 2023 to forget, just when it seemed to take off. Lula’s main constituency has very much in mind his promise to create more and better paid industrial jobs.

The expected rise in Brazil’s annual rate of inflation has prompted most analysts to say the remaining six months of 2024 will not see cuts at all.

“We see no room for a resumption of the easing cycle this year … It’s clear that rising inflation and inflation expectations are worrying the central bank. Somewhat surprisingly, the decision was unanimous. We had thought some of the more dovish Copom members might have voted for another cut,” said analysts at Capital Economics on Thursday.

“Policymakers might be trying to avoid a repeat of the market backlash fallout seen after the previous meeting when votes for a larger 50bp cut by Lula-appointed Copom members raised concerns about the politicization of monetary policy. But it may also signal that there’s a widespread agreement on Copom that the inflation outlook has worsened.”

ICIS also expected inflation to tick up in coming months, to then slowdown in 2025 and stabilize at around the central bank’s target of around 3%.

“Brazil’s inflation figures in May suggest that the progress on bringing down inflation isn’t being as expected and higher for longer interest rates are in order,” said Kevin Swift, economist at ICIS.

“In the other large Americas economy, the US has also experienced this slow pace of progress on disinflation, although the most recent reports were in the right direction. Further afield, progress on reaching inflation target of 2% has been met in the UK and the eurozone is getting close, at 2.6%.

Both jurisdictions’ central banks have a mandate to keep inflation at around 2%.

Source: ICIS

Focus article by Jonathan Lopez


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