Brazil’s Central Bank halted its interest rate-cutting cycle on Wednesday (Nov. 4), keeping the benchmark Selic rate at 13.75% in response to a recent deterioration in inflation expectations. While the decision by the Monetary Policy Committee (Copom) appeared conservative, its accompanying statement offered no guidance on what might come next. Policymakers also stopped short of signaling that they could raise rates if the inflation outlook worsens further.

The decision ended a series of five consecutive 25-basis-point cuts that began in March. The worsening inflation outlook since the presidential election prompted the shift, in line with expectations from most economists surveyed by Valor last week.

Copom said monetary policy had become more challenging, requiring “composure and caution” in light of “a substantially restrictive Selic rate, a significant increase in uncertainty surrounding the baseline scenario, higher inflation expectations, and a more pronounced slowdown in domestic economic activity.”

Policymakers acknowledged that inflation expectations had drifted further away from the 3% target, including over longer horizons, a development that “contributes to price formation and increases the cost of disinflation.” At the same time, the committee emphasized the impact of “supply shocks” on its inflation forecast for the relevant monetary policy horizon. That projection rose to 3.5% for the second quarter of 2028, from 3.2% for the first quarter of that year.

Mixed signals

For Fernando Gonçalves, head of economic research at Itaú Unibanco, those qualifications played down the deterioration in inflation expectations revealed by the latest Focus survey more than was warranted.

“I would say [the statement] was less hawkish than we expected, even though it conveyed the message that bringing inflation back to target will be challenging,” he said.

Gonçalves believes Copom sought to offset the worsening inflation forecasts by emphasizing both the influence of supply shocks and its assessment that the Selic remains “substantially restrictive.”

“This is not a statement that sends the message that interest rates will stay high for longer. It leaves things open and focuses on describing the uncertainties, even pointing to conflicting signals,” he said.

He cited the committee’s description of economic activity slowing “more sharply” and a labor market showing “signs of cooling at the margin,” despite remaining resilient.

“In a way, it creates room to look through this substantial deterioration in forecasts, since part of it stems from supply shocks and the Focus survey still points to a declining path for the Selic,” Gonçalves said.

In his view, the statement suggests that the bar for raising interest rates is quite high, while leaving open the possibility of further cuts depending on how economic conditions evolve.

Cláudio Ferraz, chief economist at Galapagos Capital, shares that interpretation, suggesting Copom may have sought to discourage speculation about a potential rate increase. Still, he cautioned that more details would emerge only with the release of the meeting minutes next week.

“Taken as a whole, it was the right decision and a tough statement, but as I said, those references did not go unnoticed,” Ferraz said, referring to the Central Bank’s characterization of the Selic as “substantially restrictive” and its acknowledgment of slowing economic activity.

Fiscal uncertainty

Galapagos expects the Selic to remain unchanged over the coming months. Ferraz believes any discussion of renewed rate cuts will have to wait until the second half of the year, once the reelected government has clarified its fiscal policy.

“As fiscal uncertainties are addressed, that could perhaps have a positive impact on asset prices, potentially halt the process of inflation expectations becoming unanchored and, ideally, eventually lead to their reanchoring. Then, given the slowdown in economic activity, it might be possible to discuss a scenario in which interest rates could be adjusted again. But that is not yet on our radar,” he said.

Roberto Padovani, chief economist at Banco BV, described Copom’s statement as “concise” and “cautious.” He said policymakers acknowledged that monetary policy had become more difficult to manage without offering clues about their next steps.

Padovani also pointed to uncertainty over the incoming administration’s economic policies as a reason for the committee’s restrained language.

“We have just come out of an election, and both the Central Bank and analysts are still waiting for information,” he said.

Although investors may interpret the statement as relatively “dovish,” signaling an inclination toward lower interest rates, Padovani argued that the Central Bank needs more information before it can take a clearer position.

“I understand that the Central Bank does not have enough information to issue a much more forceful statement. We need to know what kind of fiscal policy we are going to have. The Central Bank cannot and should not anticipate that. It cannot keep reacting to short-term tensions,” he said.

A more hawkish reading

Camila Faria Lima, chief economist at Canvas Capital, offered a different interpretation, describing the statement as slightly more hawkish. In her view, the decision to halt rate cuts was itself a significant signal, particularly given the committee’s acknowledgment of the deteriorating inflation outlook.

Faria Lima said Tuesday’s Focus survey had prompted her to revise her baseline forecast from a further 25-basis-point cut to the decision Copom ultimately made: holding the Selic steady. With inflation expectations worsening, she concluded that the argument for another reduction was no longer tenable.

“The Focus survey showed very clearly that inflation expectations were becoming even more unanchored, almost as if a sharper slowdown in economic activity did not matter. The fact is that we are facing greater inflationary pressures and expectations are being called into question even over longer horizons, with everything moving toward 4%. That sent a message that made it very difficult for the Central Bank not to react and simply stick to its flight plan,” she said.

Faria Lima therefore sees the communication as more forceful, although she acknowledged that references to a sharper economic slowdown and signs of moderation in the labor market softened its tone.

She also highlighted Copom’s decision to raise its inflation forecast for the relevant monetary policy horizon from 3.2% to 3.5%, even as that horizon shifted from the first to the second quarter of 2028.

The economist agreed with the committee’s assessment that monetary policy had become more challenging, caught between a worsening inflation outlook and a more pronounced slowdown in economic activity.

“Ultimately, the committee highlighted opposing forces, which is why it describes the scenario as more challenging. It will have to contend with both,” she said.

*By Hamilton Ferrari and Estevão Taiar — Brasília

Source: Valor International

https://valorinternational.globo.com/