Central Bank pauses loosening cycle in June

At its meeting on 18–19 June, the Central Bank of Brazil (BCB) decided to interrupt its loosening cycle and maintained the SELIC rate at 10.50%. The hold followed May’s slowdown in the pace of loosening and was unanimous.

The hold was driven by a less favorable inflation outlook. Firstly, core inflation has been above target. Secondly, the BCB’s baseline scenario inflation expectations for 2024 and 2025 were upwardly revised to 4.0% and 3.4%, respectively, from 3.8% and 3.3% projections in the May meeting. As such, inflation forecasts continued to move towards the upper bound of the Central Bank’s 1.5–4.5% tolerance band; the Bank deemed higher-for-longer interest rates necessary to re-anchor inflation expectations. The hold was also driven by domestic real-sector data: Economic activity and the labor market have recently been more robust than the Central Bank had anticipated.

The Central Bank’s implicit forward guidance suggested that the policy rate is likely to remain at its current level for some time ahead. The BCB emphasized that risks to the inflation outlook remain in both directions and that it was important to maintain a contractionary monetary policy long enough to bring down inflation and anchor inflation expectations. The next monetary policy meeting is scheduled for 30–31 July. Roughly two-thirds of our panelists anticipate the rate to end the year at its current level; the remaining see room for further cuts this year.

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