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Mar 22, 2023
Brazil to Hold Rates as Lula Mulls Fiscal Rule: Decision Guide
(Bloomberg) -- Brazil’s central bank will likely hold its key interest rate steady for the fifth straight meeting, resisting President Luiz Inacio Lula da Silva’s push for lower borrowing costs as government efforts to regain fiscal credibility get delayed.
All economists in a Bloomberg survey expect board members to keep the benchmark Selic unchanged at 13.75% on Wednesday. Policymakers led by Roberto Campos Neto had raised rates by 11.75 percentage points over a year and a half before pausing in September, and have since stressed that they haven’t discussed the beginning of the easing cycle yet.
Brazilian policymakers are convening amid the ripple effects of the US banking crisis and also a worsening domestic credit outlook. Traders expect rate cuts starting in June even as inflation runs well above target and public spending rules remain up in the air. The monetary authority is also facing mounting political pressure, as Lula and key members of his Workers’ Party push for a lower Selic. On the eve of the central bank meeting, the president said the bank was being “irresponsible” for maintaining the Selic at a six-year high.
What Bloomberg Economics Says:
“Despite intense political pressure for a rate cut, Brazil’s central bank is largely expected to hold its policy rate at 13.75%. Data released since the February meeting show underlying inflation remains higher than what would be consistent with the target. Inflation expectations rose further and are still unanchored through 2026. Those factors argue against a rate cut, despite softening growth and a decline in commodity prices.”
— Adriana Dupita, Brazil and Argentina economist
Click here for the full report.
Wednesday’s gathering will take place a few hours after the Federal Reserve has its own decision on rates. A pause in the Fed’s monetary tightening, or even a more dovish statement, is unlikely to trigger a rate cut in Brazil but could soften the tone of the bank’s post-meeting communication. Brazil’s decision will be published on the central bank’s website after 6:30 p.m. in Brasilia with a statement from its board.
Here’s what to look for:
Investors will dig into the statement for any signs of when rates could fall. Given that Brazil’s new fiscal framework has yet to be unveiled and its impact on inflation forecasts is still a way’s off, policymakers will likely refrain from making a hard commitment on easing.
“There’s still not enough information,” to assess the trajectory of government spending, said Gustavo Arruda, head for Latin American research at BNP Paribas SA. “Inflation is still running fast, forecasts for consumer prices are still high and we really don’t know what the fiscal rule will ultimately look like.”
Annual inflation estimates remain well above targets of 3.25% for this year and 3% for 2024. Core measures that strip out volatile items like food and fuels are still rising.
Still, members of Lula’s government expect the central bank to acknowledge that recent announcements such as the gradual phase-out of fuel tax breaks open the door to rate cuts.
Board members could also remove key phrases from the statement, such as the threat of resuming the tightening cycle if needed, while still communicating that the outlook requires attention, Cassiana Fernandez and Vinicius Moreira, analysts at JPMorgan & Chase Co, wrote in a research note.
The international outlook will be front and center, as policymakers are expected to comment on soaring economic uncertainties abroad.
In recent weeks, the collapse of three regional banks in the US and the purchase of Credit Suisse Group AG by UBS Group AG have roiled global markets. Brazil Finance Minister Fernando Haddad said the domestic impacts of the banking emergency have been “less turbulent” than expected.
In private, the economic team sees the global banking crisis as reason enough to loosen monetary policy, at a time when the new fiscal rule is also expected to clear the way for lower rates, according to a person with knowledge of the matter who requested anonymity because the talks aren’t public.
The global crisis “seems to be a situation of risk aversion,” said Natalie Victal, economist at Sul Americana Investimentos Dtvm. “There’s a need to monitor in case it counters the current global tightening.”
Analysts will also review the central bank’s comments on activity after gross domestic product shrank at the end of last year. Indeed, investors expect Brazil’s economic doldrums to continue this year.
--With assistance from Martha Beck.
©2023 Bloomberg L.P.
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