Key Points
- The Central Bank of Brazil signaled a potential lengthening of its monetary tightening cycle due to worsening inflation expectations.
- Policymakers raised the benchmark Selic rate by 50 basis points to 11.25% at their Nov. 5-6 meeting.
- Government policies on public transfers and wages have stoked inflation, weakening the Real and heightening fiscal concerns.
- Annual inflation rose to 4.76% in October, driven by food, energy, and service prices, and is projected to rise further in November.
The Central Bank of Brazil cautioned that worsening inflation expectations could lead to prolonged monetary tightening days after policymakers accelerated their interest rate hikes. According to minutes from the central bank’s Nov. 5-6 meeting, board members raised the Selic benchmark rate by 50 basis points to 11.25%. They expressed concern over inflation estimates exceeding the central bank’s 3% target.
In Tuesday’s minutes, central bankers underscored their commitment to maintaining credibility, indicating that monetary policy would redefine inflation expectations. Led by Roberto Campos Neto, the central bank faces mounting challenges as inflation remains elevated. This is driven by a resilient economy and strong consumer spending, partly fueled by President Luiz Inacio Lula da Silva’s policies, including increased public transfers and a higher minimum wage. These measures have heightened household consumption and stoked investor concerns over Brazil’s fiscal stability, leading to weaker Real and increased inflationary pressures.
The board acknowledged that investor concerns over Brazil’s public accounts have had a “significant” effect on asset prices and inflation expectations. Policymakers highlighted the importance of stabilizing public debt through structural spending cuts and maintaining countercyclical policies to curb inflation. They suggested that curbing spending growth could support medium-term economic growth by improving financial conditions, lowering risk premiums, and enabling better resource allocation.
Lula’s administration discusses spending cuts to restore investor confidence in Brazil’s fiscal stability. Though delayed by presidential indecision, the potential measures could be implemented through constitutional amendments and require Congressional approval.
In October, annual inflation rose to 4.76%, breaching the central bank’s tolerance range of 4.5%. Further consumer price growth is projected at 4.6% in November. The increase in inflation is driven by rising energy and food costs, exacerbated by severe weather conditions. Due to currency depreciation and supply chain pressures, industrial and service prices remain above target.
The central bank noted upside inflation risks, particularly rising food prices and a weaker currency, and stated that the disinflationary trend has stalled. Most market analysts expect the Selic rate to reach nearly 14% by mid-2025, with major Wall Street banks revising their forecasts for Brazil’s rate cycle following the recent hike.
Although policymakers refrained from signaling further moves, they reiterated a strong commitment to stabilizing inflation amid global economic volatility. The minutes emphasized that the “challenging” international environment, characterized by high economic and geopolitical uncertainty, necessitates caution in managing domestic monetary policy.
