Brazil’s Central Bank Says Even Faster Interest Rate Cuts Are Unlikely

Brazil’s central bank said a faster pace of interest rate cuts is unlikely after it kicked off an easing cycle with a bigger-than-expected reduction of 50 basis points.

(Bloomberg) — Brazil’s central bank said a faster pace of interest rate cuts is unlikely after it kicked off an easing cycle with a bigger-than-expected reduction of 50 basis points.

“The Committee judges that there is low probability of an additional intensification in the pace of adjustment,” central bankers wrote in the minutes of their Aug. 1-2 meeting published on Tuesday. 

A faster pace of rate cuts would require “substantial” improvements on inflation dynamics beyond headline measures, such as lower estimates for consumer price increases, a “sharp” widening of the output gap and more benign price pressures on the services sector, they wrote. 

Policymakers led by Roberto Campos Neto signaled plans to keep the pace of monetary easing in Latin America’s largest economy as inflationary dynamics gradually improve. Consumer price increases are now below target, while core measures excluding energy and food items are also slowing down. At the same time, gross domestic product is seen expanding just 1.3% next year.

What Bloomberg Economics Says

“Brazil’s central bank used the minutes of its Aug. 2 meeting to send two less dovish signals about the rate outlook, as we expected. First, it set a high hurdle for larger rate cuts going forward. Second, it signaled monetary policy will stay tight into 2025. That suggests policymakers may slow the pace of cuts next year.”

— Adriana Dupita, Brazil and Argentina economist

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Analysts were surprised by the split among the board last week, as four directors favored a smaller, quarter-point cut. Campos Neto’s vote was the tie-breaker, a move some investors interpreted as a compromise meant to alleviate political pressure after months of criticism from Lula and key allies. 

Ultimately, the bigger rate cut was justified by “more benign than expected” recent inflation prints, the government’s decision to keep the 3% price-growth target and the need to “recalibrate” real interest rates, which are currently among the highest in the world. 

Despite last week’s split decision, the board says it “unanimously” anticipates half-a-percentage-point reductions ahead, to ensure lower inflation estimates and an “adjustment” in real terms to its prior monetary tightening. “The scenario still calls for caution, reinforcing the view of serenity and moderation” that the board had previously expressed, central bankers wrote. 

Other Economies

Campos Neto’s team is following in the footsteps of other Latin American economies that are easing monetary policy. Chile delivered a surprise full percentage point cut in July, while Mexico and Peru are expected to begin lowering rates in coming months. 

By contrast, many central banks in developed economies, such as the Federal Reserve and the European Central Bank, recently tightened policy. 

Read More: Fed Loses to Hyperinflation-Scarred Brazil in Race to Cut Rates

President Luiz Inacio Lula da Silva’s government welcomed Brazil’s rate cut, with Finance Minister Fernando Haddad calling it “encouraging” and a “fruit of dialogue.” It was the first policy meeting for board member Gabriel Galipolo, Lula’s former deputy finance minister who is seen by many in the Workers’ Party as a successor to Campos Neto when his term ends in 2024.

Minutes of last week’s rate decision showed board members’ different views on the domestic labor market, the slowdown among global economies and whether to focus on current inflation prints or measures of underlying price pressures. A perception among investors that the institution may become more “lenient” toward inflation as Lula’s appointees enter the board was also discussed. 

Regardless of the board’s composition, central bankers “unanimously understand” the “credibility and reputation” of the monetary authority “should be ensured,” they wrote. 

Read More: Brazil Signals More Half-Point Rate Cuts Ahead in Dovish Shift

Meanwhile, Brazil’s Congress has resumed debate on key proposals that the government sees as likely to prompt more rate cuts, including a long-awaited tax reform plan and a bill to shore up public finances. 

Some members said “uncertainty persists” among investors regarding the government’s estimates for its primary budget balance. “The maintenance of the fiscal commitment in addition to a reduction in uncertainties about the tax measures that underpin the implementation of this objective, would contribute to a faster disinflationary process,” policymakers wrote. 

Most analysts now bet the benchmark rate will fall to 11.75% by December and to 9% in 2024, according to a central bank survey published Monday. 

Brazil’s central bank sees inflation at 4.9% this year and 3.4% in 2024. It targets consumer price increases of 3.25% this year and then 3% through 2026. 

(Updates with more details from the minutes and economist comments starting in fifth paragraph)

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