(Bloomberg) — Brazil’s central bank said it was important to signal that its cycle of interest rate hikes will continue in the face of an adverse inflation outlook, according to the minutes to its March 18-19 policy meeting.
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Local food prices are high and can also drive up costs in other sectors, while services inflation has accelerated in recent readings, policymakers wrote in the minutes to the meeting. Last week, they raised the benchmark Selic by a full percentage point to 14.25%, and signaled a smaller rise ahead.
“Due to the lags inherent to the ongoing monetary cycle, the Committee also deemed appropriate to communicate that the next move would be of a smaller magnitude,” they wrote in the document published on Tuesday. “Given the heightened uncertainty, it decided to indicate only the direction of the next move.”
Brazil central bankers have raised borrowing costs by 3.75 percentage points since last September as inflation runs hot in Latin America’s largest economy. Factors including extreme weather and swings in the real have pressured the cost of living. While government spending and low unemployment are bolstering demand, there are incipient signs of a slowdown in activity.
What Bloomberg Economics Says
“The minutes of the Brazilian central bank’s March meeting took a slightly more hawkish tone than policymakers’ statement accompanying the decision, but were more dovish than the communique from January’s meeting. Still, Tuesday’s report didn’t set the BCB’s next move in stone. We expect policymakers to halve their hike pace to 50 basis points in May.”
— Adriana Dupita, Brazil and Argentina economist
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Consumer prices rose 1.31% in February, marking the biggest monthly increase in three years, driven by housing, education and food and beverages. Annual inflation accelerated to 5.06%, well above the 3% target.
Unanchored price forecasts are a factor of discomfort shared by all board members and must be tamed, policymakers wrote. If the bank’s projections are confirmed, 12-month inflation will remain above top of the target tolerance interval for six consecutive months starting from January 2025. “Therefore, there would be a target breach with the June 2025 inflation,” they wrote.
