(Bloomberg) -- Brazil’s central bank said it won’t hesitate to raise its interest rate as the inflation outlook worsens, marking a significant change in guidance barely a month after pausing a monetary easing cycle.
The committee “unanimously reinforced that it will not hesitate to raise the interest rate to ensure inflation convergence to the target if it deems it appropriate,” central bankers wrote in minutes to their July 30-31 rate meeting, when they held the benchmark Selic at 10.5% for the second straight time. Still, keeping borrowing costs steady also remains a strategy moving forward, they wrote in the document published on Tuesday.
“The Committee unanimously believes that the current stage is of even greater caution and of diligent monitoring of inflation conditioning factors, without committing to future strategies,” they wrote.
Policymakers led by Roberto Campos Neto are sticking with double-digit borrowing costs after halting their nearly year-long easing cycle in June amid rising inflation forecasts. Domestic economic growth has held up, and the labor market remains tight. Furthermore, the real has tumbled almost 15% year-to-date, fanning fears that more expensive imports will spur pressure on consumer prices and propel cost-of-living expectations further above the 3% target.
What Bloomberg Economics Says:
Brazil’s central bank used the minutes of its July meeting to deliver the strongest hawkish message it could without committing to a rate hike. While we maintain our forecast for policymakers to stay on hold through year-end, the minutes raise the risk of a hike — especially if the currency remains under pressure.
— Adriana Dupita, Brazil and Argentina economist
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Swap rates on the contract due in January 2026, a gauge of market sentiment toward monetary policy at the end of next year, jumped 17 basis points in Tuesday trading as investors weighed odds of tighter monetary policy. The real appreciated 0.9% to 5.6712 per dollar, the biggest gain among major currencies tracked by Bloomberg.
“The chance of Selic increases this year has gone up,” said Marcos de Marchi, an economist at Oriz Partners. “With the exchange rate at the current level, inflation expectations remain high, and a new round of data last week showed the labor market is very tight.”
‘Thoroughly Discussed’
The depreciation of the real was “thoroughly discussed,” central bankers wrote in the minutes, noting that persistent currency swings could cause “significant” inflationary impacts that will be “duly” incorporated. “The Committee considered that it is time for diligent monitoring of the determinants of inflation and greater vigilance in face of a more challenging scenario,” they wrote.
The currency has been hit by global market turbulence and concerns that the Brazilian government is abandoning pledges to shore up fiscal accounts.
In the minutes, policymakers wrote they are “closely” monitoring fiscal news given that the perception of higher spending has had a “significant” impact on asset prices and inflation estimates. “Synchronous and countercyclical monetary and fiscal policies help ensure price stability,” they wrote.
Board members agreed there are more upside risks for consumer prices after annual inflation topped all forecasts in early July, at 4.45%, spurred by more expensive transportation.
Rising inflation estimates, stronger-than-expected services costs and chances of a persistently more depreciated currency could drive price pressures higher, central bankers wrote. Several board members added their balance of risks is now asymmetrical.
“The minutes came with a more hawkish tone,” said Mirella Hirakawa, an economist at consultancy firm Buysidebrazil. “They discussed a possible strategy of raising interest rates, and this puts an upside bias on our forecast of steady borrowing costs until the end of the year.”
Going forward, investors will face more uncertainty at the central bank as President Luiz Inacio Lula da Silva, who has consistently criticized what he sees as exorbitant borrowing costs, prepares to name a new governor and two directors by year’s end.
In the minutes, policymakers once again reinforced their commitment to tame inflation with tight borrowing costs. Still, some economists fear the monetary authority will become more tolerant toward consumer prices once Lula-backed nominees become a majority of the central bank board later this year.
Analysts in a weekly central bank survey published Monday raised their year-end inflation forecasts to 4.12% in 2024 and 3.98% in 2025.
(Updates story with economist comments in fifth paragraph)
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