Central Bank slows pace of its tightening cycle in May, as expected

Central Bank hikes rates to near 20-year high: At its 6–7 May meeting, the Monetary Policy Committee (COPOM) of the Central Bank of Brazil (BCB) increased its SELIC rate by 50 basis points to 14.75%—the highest level in nearly two decades. The rise, which followed March’s 100 basis point hike, marked a slowdown in the tightening pace and brought the cumulative hikes to 425 basis points since the current tightening cycle started in September 2024. The decision was once again unanimous and had been largely priced in by markets, as the Bank stuck to the forward guidance from its March meeting.

Above-target inflation and unanchored inflation expectations drive additional hike: The key driver of the hike remained above-target price pressures, with both headline and core inflation metrics remaining above the BCB’s 1.5–4.5% tolerance band. Moreover, inflation expectations remain unanchored. Still, the inflation outlook improved; the BCB cut its inflation projections for 2025 to 4.8% from its March projection of 5.1%, respectively. This, coupled with the small deceleration in GDP growth seen recently, likely led to the less aggressive interest rate increase.

Forward guidance is left open-ended, but tightening cycle nears its end: The Bank said it would be cautious about future monetary policy moves, as it stated risks to the inflation outlook remain higher than usual. Accordingly, the Bank did not provide explicit forward guidance this time and left future policy moves open-ended. It stated that it first needs to carefully assess the impact of the ongoing tightening cycle and of the current elevated economic uncertainty on the real economy. Moreover, the government’s fiscal policy remains a key factor to monitor due to its effect on domestic demand. Over half of our panelists expect a final 25–75 basis point increase when the Bank reconvenes next on 17–18 June. Our Consensus is then for some mild reductions by December.

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