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Brazil Keeps Rate Pace of Interest Rate Cuts While Also Recognizing Tough Global Outlook

(Bloomberg) -- Brazil’s central bank cut its key interest rate by half a percentage point for a third straight meeting and repeated guidance for more reductions of the same size in the face of a more challenging global outlook.

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Policymakers lowered the benchmark Selic to 12.25% late Wednesday, as expected by all analysts surveyed by Bloomberg. In an accompanying statement, board members wrote the current easing pace is appropriate as domestic disinflation continues and international uncertainties rise.

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“The Committee judges that the current conjuncture is more uncertain than usual and requires caution on the conduct of monetary policy,” they wrote, citing global trends including the persistence of high core inflation, rising long-term interest rates in the US and new geopolitical tensions.

Central bankers led by Roberto Campos Neto are gradually relaxing monetary policy after aggressively lifting the Selic starting in 2021 to tame a post-pandemic price spike. Cost-of-living increases ticked up in mid-October to 5.05%, though most analysts see them coming back down again during the final months of the year. On the other hand, surging US Treasury yields may reduce the space for rate cuts across Latin America.

Read More: JPMorgan Says Global Outlook Will Curb Latin America’s Rate Cuts

“The central bank commented more carefully about the worsening of the global outlook, with the elevation of the long-term interest rates in the US and the escalation of the conflict in the Middle East,” said Leonardo Costa, an economist at Asa Investments. “They also didn’t celebrate current inflation data.”

Brazil’s decision came hours after the Federal Reserve kept its main rate stable, leaving the door open to an additional hike in the near future.

What Bloomberg Economics Says

“Brazil’s central bank stayed the course on the pace of monetary easing and forward guidance at its November meeting, but adopted a more cautious tone on the global outlook. The post-meeting statement reinforces our expectation for 50-basis-point cuts in December — bringing the year-end rate to 11.75% — and at meetings in the first quarter of 2024.”

— Adriana Dupita, Brazil and Argentina economist

— Click here for full report

Economy, Budget

Latin America’s largest economy is showing initial signs of slowing as monetary policy stays restrictive. Still, analysts in a central bank survey see annual inflation running above the 3% target that will be in effect starting next year.

In part those forecasts reflect public spending concerns that were heightened again last week when President Luiz Inacio Lula da Silva said the government “doesn’t need” to fulfill its promise of eliminating the primary fiscal deficit next year at the cost of cutting spending on priority projects.

In their statement, board members reaffirmed the need to meet budget targets, given their importance in anchoring inflation expectations. They also raised their 2024 and 2025 consumer price forecasts to 3.6% and 3.2%, respectively.

Read More: Brazil Rate Cuts to End Before Forecast, Ex-Central Banker Says

Finance Minister Fernando Haddad told reporters on Monday there’s no “lack of commitment” on the administration’s fiscal policies. To close the budget gap, he is counting on Congress to approve a series of bills that would increase revenues by 168 billion reais ($33.9 billion) next year.

Higher Rate

The government will need to do more to restore credibility in financial markets. Even before Haddad’s remarks this week, analysts in the latest central bank survey had already raised their 2024 Selic forecast to 9.25%, while traders see an even higher terminal rate near 11%.

On top of that, policymakers today underscored that the global environment “requires attention and caution” from emerging market economies. Indeed, Chile surprised investors by slowing its own pace of easing for the second straight meeting last week, citing a deteriorating international outlook.

Amid a less favorable international scenario, Itau Unibanco will raise its end-of-cycle Selic forecast to 9.5% from 9%, according to economist Fernando Goncalves. There are signs that other analysts are thinking about following suit.

“The central bank could be signaling that a terminal rate of 9.25% is low,” said Eduardo Aun, a portfolio manager at AZ Quest Investimentos. “They are much more worried about the global outlook, citing risks of an adverse scenario, increases in interest rates and more persistent inflation.”

--With assistance from Giovanna Serafim.

(Re-casts story, adds economist quotes and details from the central bank statement starting in fifth paragraph)

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