Monetary authority Chief Gabriel Galípolo says unanchored expectations require “greater effort”; institution sees 70% chance of inflation above target in 2025
03/28/2025
The persistence of inflation and the perception that it will remain above the target has not only led to a sharper increase in Brazil’s benchmark interest rate, the Selic, but may also require it to stay high “for longer,” officials from the Central Bank said on Thursday (27).
“We talk a lot, we write a lot, we are aware that, with expectations unanchored at the current level, the Central Bank’s effort needs to be greater,” said Central Bank Chair Gabriel Galípolo during a press conference on the Monetary Policy Report. “That is precisely why we have moved forward and continue in a cycle that has pushed interest rates to historically high levels.”
It was the first time Mr. Galípolo took part in presenting the report — which replaced the Inflation Report — as head of the monetary authority.
“When expectations are unanchored, interest rates must be higher, as we are seeing in this cycle, and for longer — that is the second dimension [of the adjustment],” said Diogo Guillen, the Central Bank’s director of economic policy, during the same press conference.
Mr. Guillen echoed what had been written in the minutes of this month’s Monetary Policy Committee (COPOM) meeting, published on Tuesday. The document noted that long-term unanchored expectations make it harder to bring inflation back to the target and require “a tighter monetary policy and for longer than would otherwise be appropriate.”
In its baseline scenario, the Central Bank projects inflation of 5.1% this year and 3.7% in 2026. Inflation would only approach the continuous target of 3% in the third quarter of 2027, when it is expected to fall to 3.1%.
Mr. Galípolo said the Central Bank knows that, in the short term, it will face inflation above the target and, therefore, more contractionary interest rates. The monetary authority sees a 70% chance of the IPCA consumer price index ending this year above the upper limit of the target range (4.5%) and zero probability of falling below the lower limit. For 2026, it estimates a 6% chance of inflation falling below the lower limit and a 28% chance of exceeding the upper limit.
Mr. Galípolo avoided giving any hints about COPOM’s next steps. Last week, the committee signaled a further increase in the Selic rate at its May meeting, but likely smaller than the hikes made at the two previous meetings. Last week, the COPOM raised the Selic from 13.25% to 14.25%.
The signal of a smaller hike left open the possibility of an increase of 25, 50, or 75 basis points. Market odds currently favor a 50-bp hike, though a 75-bp increase remains on the table.
When asked about how he viewed market bets, Mr. Galípolo refrained from giving a clear signal. “If we were convinced, we would have written that [in the minutes],” he said. “I believe the minutes are still quite valid, they’re not outdated. We want to preserve these degrees of freedom to be able to make that decision at the right time.”
However, the Central Bank chief made it clear that the monetary tightening is not over. “For all the existing reasons, the cycle needs to be extended. However, due to the uncertainties, to a lesser extent. We can only provide guidance for the next meeting about what we intend to do,” he said.
Mr. Galípolo also gave further clarification on why the COPOM’s statement and minutes referred to the “lags inherent to the monetary tightening cycle” to justify the signal of a smaller Selic hike at the next meeting.
“We are now entering a level of interest rates that is contractionary with some certainty,” he said. According to him, the Central Bank is monitoring economic activity data and other indicators, such as expectations, to “understand whether this level of monetary policy is contractionary enough.”
When asked whether the impact of the new payroll-deductible loan program for private-sector workers had been factored into the Central Bank’s projections, Mr. Galípolo said it had not and explained that several uncertainties remain.
One of them is whether the measure will result in a new flow of credit or simply a replacement of old debt with new debt. He said he did not see the program as a government initiative to stimulate the economy at a time when the Central Bank is seeking to cool it down to lower inflation. “It is a measure more focused on structural rather than cyclical issues,” he said.
He also noted that the bill exempting workers earning up to R$5,000 per month from income tax had not been considered in the Central Bank’s projections either.
*By Gabriel Shinohara, Alex Ribeiro, Estevão Taiarand Anaïs Fernandes — Brasília and São Paulo
Source: Valor International