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Brazil Monetary Policy September 2023

Brazil: COPOM reduces rates by 50 more basis points in September

At its 19–20 September meeting, the Monetary Policy Committee (COPOM) of the Central Bank of Brazil (BCB) continued its loosening cycle and cut the benchmark SELIC rate by another 50 basis points to 12.75%. The move followed August’s same-sized cut. In contrast to August, September’s decision regarding the size of the cut was unanimous among the nine members of the Committee. As the Bank did not deviate from the path announced in August, the reduction had been priced in by markets.

The move came despite a stronger-than-anticipated economy and was driven by the COPOM’s expectation that an economic slowdown lies ahead. Moreover, the BCB was comfortable with another rate cut because, despite remaining above target, core inflation continued to soften, while the pickup in headline inflation was in line with its expectations. That said, the BCB upwardly revised its baseline headline inflation forecast to 5.0% for 2023, 3.5% in 2024 and 3.1% in 2025, implying that inflation will remain above the Bank’s 3.25% and 3.00% targets for the years 2023 and 2024–2025, respectively. Nonetheless, the Bank stated that the cut was consistent with its strategy to bring inflation to target over “the relevant horizon, which includes the year 2024”.

The Committee stated that if its inflation expectations were met, it would cut interest rates by another 50 basis points at its next policy meeting, scheduled for 31 October–1 November. However, mirroring its August statement, it emphasized the need “to persevere with a contractionary monetary policy until not only the disinflation process is consolidated but also the anchoring of expectations around its goals”. The Bank noted that risks to the inflationary outlook remained in both directions.

Our panelists expect a cumulative 50–125 basis points of additional cuts by end-2023.

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