Brazil central bank minutes raise possibility of August rate cut

By Marcela Ayres

BRASILIA (Reuters) -Brazil’s central bank signaled on Tuesday that a majority of its policymakers see a possibility of a “parsimonious” rate cut at its next meeting in August, provided that a more benign inflation scenario consolidates.

The minutes of the June 20-21 meeting, where the rate-setting committee known as Copom kept the benchmark rate at 13.75% for the seventh consecutive time, revealed a divergence of opinions regarding the signaling of future steps.

“The prevailing assessment was that the continuation of the ongoing disinflationary process, with its consequent impact on expectations, may allow the necessary confidence to be built up to start a parsimonious process of inflection at the next meeting,” the central bank said.

A minority of Copom members took a more cautious stance, the minutes showed.

In response to the minutes, short-term interest rate futures opened lower and the yield curve indicated an unequivocal rate cut in August, with a 95% probability of a reduction of 25 basis points.

Meanwhile, Brazil’s currency firmed slightly against the U.S. dollar.

Finance Minister Fernando Haddad, who had previously expressed dissatisfaction with the central bank’s hawkish approach, told journalists the prospect of forthcoming monetary easing was “good” and shows that the government is on the “right path.”

William Jackson, chief emerging markets economist at Capital Economics, said it is now “hard to argue against the start of an easing cycle in August,” also citing support from data on Tuesday showing annual inflation to mid-June at 3.4%. He had previously not expected a rate cut until September.

Although the central bank adopted a more moderate tone by excluding the possibility of rate hikes from its policy statement, it refrained last week from signaling when monetary easing could kick off, pointing instead to a data-dependent stance.

The communication drew criticism from President Luiz Inacio Lula da Silva, ministers and some market participants who expected a notable shift in the bank’s tone due to lower-than-expected inflation, a stronger currency and easing inflation expectations.

In addition, future interest rates fell as Congress advanced the government’s new fiscal rules, seen as crucial to curb uncontrolled public debt after Lula’s increased social spending to fulfill campaign promises.

In the minutes, the bank pointed out that some members still support the need to observe a further decrease in long-term inflation expectations and more evidence of disinflation in the more cyclically sensitive components.

The central bank stressed that inflation expectations declined slightly but remain de-anchored from official targets, partially due to the questioning about a possible change in future inflation targets, adding that “decisions that re-anchor expectations can lead to faster disinflation.”

The National Monetary Council, consisting of the finance minister, planning minister and central bank governor, will convene on Thursday to confirm the 3% inflation targets for 2024 and 2025 as well as set the official target for 2026.

Lula’s earlier push for higher inflation targets to ease monetary policy has lost momentum, with Finance Minister Haddad recently emphasizing the government’s inclination to adjust the timeline for achieving the goals, favoring a continuous approach over the current calendar year-based target.

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