Brazil central bank holds interest rates, eyes moderating growth

By Marcela Ayres

BRASILIA (Reuters) -Brazil’s central bank on Wednesday held interest rates at a nearly six-year high for the second policy meeting in a row, noting that economic growth seems to be slowing but inflation remains high.

The bank’s rate-setting committee, known as Copom, left its benchmark Selic interest rate at 13.75%, as expected by all 34 economists polled by Reuters.

Economists and traders have been watching for clues about when rates might start falling again. Policymakers paused an aggressive tightening cycle in September after 12 consecutive increases lifted rates from a 2.0% record low in March 2021.

The central bank again stressed on Wednesday that its strategy involves keeping the Selic rate at this level for a “sufficiently long period” to bring inflation back to “around its targets.”

In their statement of Wednesday’s rate decision, Copom said indicators since their September meeting suggested “more moderate” economic growth in Brazil, but consumer inflation remains “high.”

Rafaela Vitoria, chief economist at Banco Inter, said the statement seemed harsh in light of the recent improvement in inflation, with policymakers warning again that they may resume hikes if needed.

“The disinflation outlook is more positive, with a slowing economy and cheaper commodities. I think inflation will continue to fall faster than we expected,” she said, adding that expects a first rate cut as early as March.

Higher borrowing costs and energy tax cuts have contributed to three straight months of deflation through September. In the 12 months through mid-October, inflation fell to 6.85%.

While still above the 3.5% target for this year, inflation has eased sharply after running in double digits from September 2021 until July, fueled by surging commodity prices on the back of the Ukraine war.

In one of the few changes to the statement, the central bank indicated that 2023 and 2024 are now equally weighted on its policy horizon.

Policymakers held their inflation outlook for this year unchanged at 5.8%, but raised their forecast for next year to 4.8%, from 4.6% last month, compared to a 3.25% target.

For 2024, they raised the inflation forecast to 2.9%, from 2.8% last month, compared to a 3% target.

The outlook for government spending, which Copom again flagged as a potential upside risk for inflation, should be clearer after Sunday’s presidential election.

Polls show former leftist President Luiz Inacio Lula da Silva narrowly leading right-wing incumbent Jair Bolsonaro. Both have made expensive promises on the campaign trail, including the extension of more generous welfare payments, which would tweaking a constitutional spending cap.

After a law established the formal autonomy of the central bank last year, central bank chief Roberto Campos Neto is set to serve out his term through 2024, regardless of the election’s result.

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