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Brazil’s Central Bank signals high interest rates for longer

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

https://valorinternational.globo.com/
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With Selic at 14.25%, Brazil’s Central Bank signals smaller hike ahead

The 100-basis-point hike announced Wednesday marks the fifth consecutive increase, pushing the benchmark interest rate to its highest level since 2016

03/20/2025

As expected, the Central Bank’s Monetary Policy Committee (COPOM) raised the benchmark Selic interest rate from 13.25% to 14.25%. The key question now is what comes next. On this front, the committee indicated that, if the expected scenario is confirmed, the adjustment at the May meeting will be of a “smaller magnitude.”

The unanimous decision marks the fifth hike in the monetary tightening that began in September 2024, bringing the Selic to its highest level since October 2016, during the Michel Temer administration. This move also signaled the end of the forward guidance introduced in December when the Central Bank raised rates by 100 basis points and indicated two more hikes of the same size in January and March.

The COPOM justified this week’s decision by pointing to a “challenging scenario” for inflation convergence. “Given the persistent adverse conditions for inflation convergence, the high level of uncertainty, and the inherent lags in the ongoing tightening cycle, the committee anticipates, if the expected scenario is confirmed, a smaller adjustment at the next meeting,” it said.

The committee refrained from making commitments beyond May, saying only that the total magnitude of the tightening cycle will be guided by its “firm commitment” to bringing inflation back to target. Future decisions will depend on inflation dynamics, forecasts, expectations, the output gap (a measure of economic slack), and the overall risk balance.

The assessment that inflation risks remain skewed to the upside was maintained. The statement also reiterated that market perceptions regarding fiscal policy continue to have a “significant impact” on asset prices and expectations.

Inflation forecasts

However, the COPOM slightly lowered its inflation forecasts for 2025, from 5.2% to 5.1%, and for the relevant monetary policy horizon—now the third quarter of 2026—from 4% to 3.9%. The inflation target is 3%, with a tolerance band of 150 basis points in either direction.

“The latest scenario is marked by further de-anchoring of inflation expectations, high inflation projections, resilient economic activity, and labor market pressures, all of which require a more contractionary monetary policy,” the committee said.

Regarding economic activity and the labor market, the COPOM maintained its previous assessment that indicators remain strong but noted this time that growth is showing “early signs of moderation.”

In its January meeting minutes, the COPOM had already mentioned “incipient” signs of “some moderation” in growth but cautioned that the data was high-frequency and required careful interpretation. This view was later echoed by Central Bank Chair Gabriel Galípolo and Economic Policy Director Diogo Guillen in public statements.

The Central Bank’s Economic Activity Index (IBC-Br), a GDP proxy, rose 0.89% in January from December, exceeding market expectations. However, in December 2024, the index had shown a 0.60% drop compared to November.

Regarding the external environment, the COPOM highlighted that global conditions remain “challenging,” particularly due to economic policies in the United States, and pointed to uncertainties surrounding U.S. trade policy and its potential effects.

Following the decision, Finance Minister Fernando Haddad attributed the rate hike to the guidance issued at the end of 2024. “The Central Bank president said the guidance would be followed,” he said.

On the same day, the Federal Reserve kept its benchmark interest rate unchanged in the 4.25%-4.50% range. After the decision, Fed Chair Jerome Powell said that a significant portion of this year’s inflation is expected to come from trade tariffs imposed by President Donald Trump. However, he noted that it is still too early to determine the full impact.

*By Gabriel Shinohara and Alex Ribeiro, Valor — Brasília and São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazil’s Central Bank makes record dollar intervention in December

Last month, monetary authority sold $21.57bn in the spot market to counter a record $26.41bn outflow

01/09/2025

The Central Bank of Brazil carried out its largest monthly intervention in the spot dollar market in December 2024, marking the most significant activity since the country adopted the floating exchange rate in 1999. The monetary authority sold $21.57 billion in the spot market last month, a record intervention driven by a historic dollar outflow of $26.41 billion, according to monthly currency flow data dating back to 1982.

“December is always a challenging month. However, the outflow in 2024 was significantly stronger, heavily concentrated in the financial account,” explained Sérgio Goldenstein, chief strategist at Warren Investimentos and former head of the Central Bank’s Open Market Department (DEMAB). “It made sense for the Central Bank to intervene in the spot market rather than through swaps because the pressure was concentrated precisely in the spot market, given the volume of physical dollar outflows.”

Until November, Brazil’s currency flow remained in positive territory, buoyed by strong commercial account results that more than compensated for financial outflows. However, this trend reversed sharply in December, a month typically marked by substantial dollar outflows for profit and dividend remittances. In October, Valor had already highlighted that financial account outflows were heading for a record high in 2024.

Over the year as a whole, Brazil posted a total net outflow of $18.01 billion. The commercial account contributed positively with an inflow of $69.2 billion, but this was outweighed by the financial account’s outflow of $87.21 billion.

Faced with December’s unusually high outflows, the Central Bank engaged in unprecedented foreign exchange market activity. In November, it conducted line auctions (dollar sales with a repurchase commitment), a tool traditionally used at year-end to address specific demands. However, the monetary authority also opted to sell reserves in the spot market to alleviate the impact of accelerating financial outflows.

The decision to auction dollar sales in the spot market was driven by the rapid deterioration of exchange rate levels. This was partially attributed to heightened fiscal risk perceptions following disappointment with the federal government’s spending review package, as well as increased global risks. The Central Bank’s focus on reserve sales was also influenced by unhedged dollar outflows—dollar movements without the purchase of future contracts.

“Throughout the month, we observed that some outflows were unhedged, which was crucial in the real’s depreciation movement. As the Brazilian currency experienced a rapid devaluation, driven by increased risk premiums, I believe this devaluation was decisive for the Central Bank to intervene more effectively in the exchange market through spot auctions,” Mr. Goldenstein noted.

Throughout 2024, the Central Bank maintained a strategy of targeted foreign exchange interventions. For instance, in April, it used currency swap contracts to manage the maturity of NTN-A bonds, while in August and early September, it conducted both swaps and spot auctions to address the rebalancing of the EWZ index fund, the top ETF for Brazilian stocks in New York. By contrast, in 2023, the monetary authority made no extraordinary interventions.

Central Bank’s approach

Pramol Dhawan, head of emerging market portfolio management at Pimco, which oversees approximately $2 trillion, believes Brazil’s current currency intervention program is largely reactive and needs a structured approach, as it may not effectively address current economic challenges. “In contrast, central banks like those of Peru and Turkey, with floating exchange rate systems, have clearer guidance for intervention, leading to better outcomes through greater transparency,” he said.

Historical data compiled by Valor shows that the Central Bank’s actions have closely tracked the currency flow since 1999. During periods of strong dollar inflows, the bank typically intervened through purchases, while outflows led to dollar sales. However, this trend was partially broken in 2023, when the Central Bank refrained from purchasing dollars despite a positive currency flow.

Although critical of the Central Bank’s current intervention approach, Mr. Dhawan recognizes the complexities of the current environment. “Political factors, including skepticism about fiscal policy and the early onset of the 2026 political cycle, cast doubt on the appropriateness of the Central Bank’s actions. With ample market liquidity and no clear signs of dysfunction, the necessity of such interventions is debatable,” he added.

In December, during a press conference on the Inflation Report, then Central Bank Chair Roberto Campos Neto said the monetary authority should intervene whenever it detects signs of dysfunction in the exchange rate. While December typically sees significant capital outflows, the record level in 2024 was particularly striking, exceeding the second-largest December outflow on record—from 2019—by 50%.

The Central Bank identified several factors contributing to the negative flow, including larger dividend payments by companies with strong earnings and increased investments by Brazilians abroad. “We began to see a greater outflow [of capital coming] from individual investors more recently, through [digital] platforms with smaller transactions,” Mr. Campos Neto said.

Roberto Lee, CEO and co-founder of Avenue, a brokerage allowing Brazilians to invest abroad, noted a marked rise in outflows during the last quarter of 2024. “The profile shifted towards more conservative investors seeking fixed income and liquidity. This was a sentiment we didn’t observe earlier in the year when expectations for Brazil were higher,” he observed.

Mr. Lee emphasized that while this shift was not comparable in scale to corporate outflows, it was a trend mirrored across emerging markets. “This is not a new sentiment. In the past, there have been instances when Brazilians adopted a more conservative stance. The difference now lies in the relatively recent infrastructure [of digital platforms], which has been around for roughly five years. Previously, these investors would turn to the CDI [Interbank Deposit Certificate]. Now, they have the option to choose safer assets. For a ‘flight to quality’, you first need an airplane ticket.”

Mr. Goldenstein added that the outflows may also have included a reversal of foreign investor inflows seen earlier in the year. “From July to November, foreign investors increased their portfolio allocation in domestic debt. We will need to wait for December’s data to confirm, but it is likely that a ‘stop-loss’ movement and reduced allocations occurred throughout much of the second half,” he suggested.

December also witnessed heightened stress in the domestic interest rate and public bond markets. Long-term rates spiked, triggering stop-loss movements among foreign investors, particularly in long-term fixed-rate bonds. This prompted the National Treasury to step in with public bond buybacks to stabilize the market.

*By Arthur Cagliari  — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazil’s Central Bank speeds up tightening, raising rates by 100bp

Citing an adverse scenario, the Monetary Policy Committee unanimously raised the Selic policy rate to 12.25%

12/12/2024

The Monetary Policy Committee (COPOM) accelerated its tightening pace, raising the benchmark Selic rate from 11.25% to 12.25%. Citing a more adverse and less uncertain scenario, the committee also signaled two additional hikes of 100 basis points each for the upcoming meetings, “contingent on the expected scenario being confirmed.”

With this guidance, the newly configured COPOM in 2025, chaired by Gabriel Galípolo and with seven of its nine seats occupied by appointees of the current government, could raise the Selic rate to 14.25% by March. This level would be the highest since August 2016. Wednesday’s decision was unanimous.

The COPOM said the total magnitude of the tightening cycle will depend on its “firm commitment” to anchoring inflation to the target and “will depend on the evolution of inflation dynamics.” The continuous inflation target from 2025 onwards is 3% per year, with a tolerance band of 150 basis points in either direction.

The committee cited factors influencing the cycle’s magnitude, including the evolution of inflation components most sensitive to economic activity and monetary policy. Additionally, the statement highlighted inflation projections, inflation expectations, economic slack (the output gap), and the balance of risks—factors that could lead inflation to deviate from the Central Bank’s forecasts.

On economic activity, the COPOM noted the ongoing “dynamism” in the labor market. It pointed out that the 0.9% GDP growth in the third quarter indicated a further narrowing of the output gap. A positive output gap, already a factor in previous meetings, suggests that economic activity is above potential, potentially fueling inflation.

The committee also emphasized that there has been additional de-anchoring of inflation expectations and upward revisions to its projections. The COPOM now forecasts the IPCA inflation index at 4.9% in 2024, 4.5% in 2025, and 4% in the second quarter of 2026. Meanwhile, the Central Bank’s Focus survey, which aggregates market expectations, shows a median inflation forecast of 4.84% for this year, 4.59% for 2025, and 4% for 2026. The second quarter of 2026 is currently the relevant horizon for monetary policy.

The combination of de-anchored expectations, stronger-than-expected activity, and a wider output gap requires “an even more contractionary monetary policy,” according to the COPOM. Regarding the balance of risks, the committee noted that risks have materialized, and the scenario is now “less uncertain and more adverse” than in the previous meeting in November. It also highlighted a persistent upward bias in the balance of risks.

The Central Bank assessed that market reactions to the government’s fiscal measures significantly impacted asset prices and expectations, particularly regarding risk premiums, inflation expectations, and the exchange rate. These factors, the committee argued, contribute to “a more adverse inflationary dynamic.”

In late November, the government announced fiscal adjustment measures expected to have a R$70 billion impact over the next two years. After the measures were disclosed, the exchange rate per U.S. dollar breached the R$6 level. On Monday, however, the U.S. currency closed at R$5.9682.

LCA Consultores noted that the tone of the COPOM statement was the most conservative since 2016, according to an index developed by the firm. “It was the most ‘hawkish’ statement since communications reached a minimum number of sentences for analysis,” said economist Bruno Imaizumi from LCA. “This is consistent with the surprising 300 basis points already in the pipeline. It aims to fully dispel the doubts that the COPOM itself created in May.”

Mr. Imaizumi referred to the May decision, when the committee was split. Four members appointed by the current government voted for a sharper rate cut, while the other five, already on the Central Bank’s board, favored a smaller 25-basis-point cut.

When asked about the COPOM’s decision, Finance Minister Fernando Haddad said it was surprising on one hand but “had already been priced in” on the other. He added that he would review the statement and consult with others after the quiet period.

(Victor Rezende contributed reporting.)

*By Gabriel Sinohara e Alex Ribeiro

Source: Valor International

https://valorinternational.globo.com/
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