Brazil’s Central Bank Sees Inflation Improving, Fanning Bets of Interest Rate Cuts
(Bloomberg) -- Brazil central bank President Roberto Campos Neto said there are positive signs on inflation coming from lower electricity and commodity prices, further fueling a selloff in the real as traders bet interest rate cuts may come earlier than expected.
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Crucial core inflation readings, which strip out volatile items including food and energy, had a “slight improvement” in data published earlier today, Campos Neto said Thursday during an interview with local TV station GloboNews.
“The data, in fact, was better,” Campos Neto said in reference to the mid-May inflation report. “Again, we have said that inflation has been improving at a slow pace. The inflation deceleration has been a little bit slower than we expected, but we see several positive signs ahead.”
Interest rate futures touched session lows at the start of Campos Neto’s comments as traders weighed chances that policymakers are close to starting an easing campaign. The real added to losses, weakening 1.6% to 5.04 per dollar.
“It’s reinforcing bets for rate cuts in August,” said Antonio Madeira, an economist at MCM Consultores. Most analysts see the easing cycle beginning with a quarter-of-a-point reduction in September, according to a weekly central bank survey published on Monday.
Congress is sending the right message, and the approval of new fiscal rules may influence inflation expectations, Campos Neto said. Still, he reiterated that there’s no mechanical relationship between monetary and fiscal policy.
The central bank led by Campos Neto is holding Brazil’s benchmark interest rate steady at 13.75% even as headline inflation pressures ease. Board members have remained cautious as they see core measures still running hot, and they are trying to tame expectations that consumer price increases will accelerate again later this year while also remaining above the bank’s targets through 2025.
President Luiz Inacio Lula da Silva has publicly criticized monetary policy since taking office in January, calling it “absurd” and arguing that it has failed to address the root causes of inflation while instead boosting unemployment.
Monetary policy takes longer to have an effect on the economy than fiscal policy, Campos Neto said in the interview. He added that he is on good terms with Finance Minister Fernando Haddad and talks regularly with Deputy Finance Minister Gabriel Galipolo, now nominated to take a seat on the central bank’s board.
Consumer inflation slowed to 4.07% in mid-May, down from the 2022 peak above 12%. The reading was within the monetary authority’s tolerance range, potentially bolstering Lula’s push for lower rates.
“I understand there’s anxiety around high interest rates,” Campos Neto said, adding that Lula “has a right” to publicly debate monetary policy. “Our mission is to bring inflation back to the 3% goal, with minimal costs to the economy.”
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Haddad and Planning Minister Simone Tebet are expected to meet next month with Campos Neto to set the inflation target for 2026. On Thursday, the central bank chief reiterated his arguments against changing current goals, saying it wouldn’t lead to more flexibility for the monetary authority.
High interest rates are the main obstacle for Lula’s promises of economic prosperity. Latin America’s largest nation is witnessing a credit squeeze that has been exacerbated by the collapse of retail giant Americanas SA.
Businesses face increased challenges to access corporate loans, while household debt remains around record levels. Most analysts see gross domestic product expanding by around 1% this year.
Read More: Brazil’s Real Gains as Lower House Approves Tougher Fiscal Rules
Congress is moving forward with a bill to shore up Brazil’s public finances, a plan Lula hopes will prompt rate cuts. The lower house this week passed a stricter version of the law that addressed some investor concerns about overspending.
--With assistance from Beatriz Reis and Felipe Saturnino.
(Updates with economist comments and details from the interview throughout)
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