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Brazil Monetary Policy August 2023

Brazil: COPOM kicks off loosening cycle more aggressively than expected in August

At its 1–2 August meeting, the Monetary Policy Committee (COPOM) of Brazil’s Central Bank (BCB) kicked off its loosening cycle, slashing the benchmark SELIC rate by 50 basis points, to 13.25%. The move marked the first lowering of rates in three years, after the BCB began its tightening cycle in March 2021—delivered a cumulative increase of 1,175 basis points—before holding rates steady for seven consecutive meetings from September 2022. The decision regarding the size of the cut, which surprised markets, was not unanimous: Four of the nine members of the Committee voted for a smaller 25 basis point cut— the size of the cut markets had penciled in.

The decision to cut rates was driven by the COPOM’s success in bringing inflation under control. Having peaked at 12.1% in April 2022, inflation fell to a 33-month low of 3.2% in June—below the Central Bank’s 3.25% target for 2023. Moreover, the BCB downwardly revised its baseline headline inflation expectations to 4.9% for 2023 and 3.0% for 2025—the projection for 2024 was left unchanged at 3.4%. If these forecasts are met, inflation will hit its target of 3.0% for 2025. The COPOM stated that the improvement of both the current inflationary scenario and the outlook had facilitated the start of the easing cycle.

The Committee’s forward guidance stated that if the evolution of inflationary pressures developed as expected, “the members of the Committee, unanimously, foresee a reduction of the same magnitude in the next meetings and assess that this is the appropriate pace to maintain the contractionary monetary policy necessary for the disinflationary process”. The Bank noted that risks to the inflationary outlook remained in both directions. Our panelists expect between 25–200 basis points worth of additional cuts by end-2023.

The next monetary policy meeting is scheduled for 19–20 September.

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