© Reuters. A general view of the Central Bank headquarters building in Brasilia, Brazil February 14, 2023. REUTERS/Adriano Machado
By Peter Frontini
SAO PAULO (Reuters) -Brazil’s central bank kicked off its rate-cutting cycle more aggressively than expected on Wednesday, reducing its benchmark interest rate by 50 basis points and signaling more of the same in the months ahead due to an improving inflation outlook.
The bank’s rate-setting committee Copom cut its Selic policy rate to 13.25%, as just 10 of 46 economists surveyed by Reuters had anticipated. The rest expected a smaller reduction of 25 basis points.
Brazil’s first rate cut in three years came after policymakers held borrowing costs steady since September 2022, following 1,175 basis points of rate hikes to battle inflation, the world’s most aggressive monetary tightening at the time.
Although Wednesday’s policy decision was closely divided, Copom’s policy statement signaled a shared outlook to keep up the pace of rate cuts in coming months.
“If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings,” policymakers wrote, calling that pace appropriate to keep inflation under control.
“The relatively dovish tone … suggests that policymakers’ inflation concerns are dissipating more quickly than we’d anticipated,” said William Jackson, chief emerging markets economist at Capital Economic, in a note to clients.
“As a result, we now expect interest rate cuts to be more front-loaded,” he added, revising his year-end Selic forecast to 11.75%, down from a previous forecast of 12.50%.
Wednesday’s rate decision reflected a split among board members, with five votes in favor of the 50-basis-point cut and four votes for a more modest 25-basis-point cut.
It was Copom’s first policy meeting to include two of President Luiz Inacio Lula da Silva’s nominees to the central bank’s board, whom central bank chief Roberto Campos Neto joined in voting for the more aggressive interest rate reduction.
Lula has publicly criticized Campos Neto, a holdover from his right-wing predecessor, for keeping borrowing costs stable despite falling inflation. Finance Minister Fernando Haddad had called for a rate cut of 50 basis points earlier on Wednesday.
Haddad later cheered the decision, praising Campos Neto for his openness to dialogue and promising “harmony” between fiscal and monetary policy.
Lula’s leftist government has eased investor concerns with new fiscal rules in Congress and a landmark reform on consumption taxes. Fitch Ratings recognized progress on the government’s economic agenda in a decision last week to upgrade Brazil’s sovereign rating.
Cooling economic activity and a stronger exchange rate have also helped to bring consumer inflation in Brazil down to 3.19% in the 12 months to mid-July, dipping below the central bank’s official target of 3.25% for this year.
Inflation is expected to pick up again in the second half of the year, due to less favorable base effects. The central bank updated its 2023 inflation projection on Wednesday to 4.9%, from 5.0% in June.
Copom said rate cuts are consistent with its strategy to bring inflation down to its target over the relevant horizon for monetary policy, which now includes 2024 and 2025, to a lesser extent.
Brazil’s inflation target is 3% for both years. Policymakers said in their statement that they now see consumer prices rising by 3.4% in 2024 and 3.0% in 2025.
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