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Brazil Monetary Policy May 2024

Brazil: Central Bank slows down loosening pace in May

At its meeting on 7–8 May, the Central Bank of Brazil (BCB) decided to slow its loosening cycle and cut the SELIC rate by 25 basis points to 10.50% per annum. The cut was the seventh in a row but was not unanimous; four members—all appointed by President Lula da Silva—out of the total nine preferred a larger 50 basis point reduction. Despite the Bank deviating from the path it suggested at its last meeting, markets had priced in the move.

Two key factors influencing the Central Bank’s decision to deliver a smaller cut were recently stronger-than-expected economic activity and labor market indicators. Moreover, the disinflation process has recently slowed down, and inflation expectations remain unanchored. Furthermore, the BCB’s baseline scenario inflation expectations for 2024 and 2025 were upwardly revised to 3.8% and 3.3%, respectively, from the 3.5% and 3.2% projections in the March meeting. Consequently, the Bank forecasts inflation to average above the midpoint of its 1.5–4.5% tolerance band.

The Central Bank did not provide explicit forward guidance on future interest rate movements. It noted that risks to the inflationary outlook remain in both directions and that the current level of the interest rate is compatible with bringing inflation to target. The Bank added that monetary policy should remain contractionary until the disinflation process consolidates and inflation expectations are anchored around the midpoint of the tolerance band. The next meeting is set for 18–19 June. Our panelists expect 25–200 basis points of additional rate cuts before the end of 2024.

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