Brazil central bank holds interest rates after 12 straight increases

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BRASILIA — Brazil’s central bank on Wednesday opted to keep interest rates unchanged, halting a cycle of aggressive monetary tightening, even as U.S. and European policymakers continue to struggle to catch up with the inflation

The bank’s rate-setting committee, known as Copom, decided by a 7-2 vote to leave its Selic benchmark interest rate at 13.75% after 12 consecutive increases, as expected by 24 of the 32 economists polled by Reuters.

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With that, policymakers likely ended what had been the world’s most aggressive rate hike cycle, lifting the Selic rate to a record 2% in March 2021 and putting Brazil ahead of many central banks that they only started raising rates recently.

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The Federal Reserve made its third big rate hike in a row on Wednesday and marked another this year.

Brazil’s central bank decided to halt rate hikes after consumer prices posted their second straight monthly drop in August, helped by fuel and energy tax cuts.

Still, Copom’s split decision, with two committee members voting in favor of a “residual” interest rate hike of 25 basis points, underscored lingering concerns about inflation, which reached a almost 20-year high in Brazil just a few months ago.

“The Committee reinforces that future monetary policy steps can be adjusted and will not hesitate to resume the tightening cycle if the disinflationary process does not continue as expected,” policymakers wrote in their decision statement.

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José Francisco Gonçalves, chief economist at Banco Fator, said that while the majority of the committee voted to keep rates in place, its statement that it left the door open to reviving rate hikes sent a message clear about staying alert to price pressures.

“The hawkish message to some extent replaces the 25 basis point increase that we expected,” he said.

In a note to clients, he predicted that the yield curve would need to tighten on Thursday to reflect interest rates that will only start to fall in the fourth quarter of 2023.

Others have backed easing central bank policy earlier, including Economy Minister Paulo Guedes, who predicted rate cuts as early as 2023.

However, central bankers have taken a tougher tone in recent public comments, stressing that it is too early to start discussing lower rates as the battle with inflation is far from over.

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Copom’s inflation forecast for 2023 was unchanged from last month at 4.6% in Wednesday’s statement, and its outlook for 2024 rose to 2.8% from 2 .7% previously, against an official target of 3%.

Twelve-month inflation in Brazil was in double digits from September 2021 to July, suffering from a pick-up in demand for services after the pandemic and rising food and fuel prices after the war in Ukraine .

The central bank’s inflation forecast for this year fell to 5.8% from 6.8% last month, still well above the 3.5% target, with a margin of tolerance of 1.5 percentage points on both sides. (Reporting by Marcela Ayres Editing by Brad Haynes)