Brazil’s central bank divided over services inflation improvement

BRASILIA (Reuters) – Brazil’s central bank voiced concerns over inflation expectations not aligning with official targets and noted differing opinions among board members on services inflation improvements, ruling out any acceleration in its easing cycle, according to the minutes of its Sept. 19-20 meeting.

While some members of the rate-setting committee Copom pointed out the decrease in closely watched services inflation at the meeting last week, when the central bank cut the benchmark Selic interest rate by 50 basis points to 12.75%, others took a more cautious approach.

This other group highlighted that the underlying fundamentals for services inflation dynamics were uncertain, given economic activity and labor market resilience.

Policymakers had previously signaled further rate cuts of the same size ahead, tempering market expectations for a faster pace later in the year. The central bank is now emphasizing a low likelihood of larger reductions in the Selic rate, which would require substantial positive surprises in inflation.

William Jackson, chief emerging markets economist at Capital Economics, said that as mid-September inflation figures released on Tuesday showed a marginal uptick in core services inflation, breaking a consistent trend of decline since February, the concern among some Copom members regarding this issue was likely to gain momentum.

“These inflation data will have given ammunition to Copom’s hawks and support our view that the easing cycle will continue in 50-basis-point steps until the middle of next year, before shifting to smaller 25-bp steps, bringing the Selic rate to 9.50% by end-2024,” he wrote in a note to clients.

Speaking at an event hosted by J. Safra bank, central bank monetary policy director Gabriel Galipolo said on Tuesday that the latest services inflation data came with “a little bit of surprise” in indicators that tend to be more volatile. But he stated that the headline figure, which reached an annual 5.00%, was positive.

MISALIGNED EXPECTATIONS

In the minutes, the central bank also signaled that part of its board was “particularly concerned” about the possibility of inflation targets becoming unanchored for an extended period, after saying that the divergence from inflation targets remains “a matter of concern.”

Market participants surveyed weekly by the central bank project inflation at 3.86% in 2024 and 3.5% in 2025, exceeding the official 3.0% target for the two years guiding current monetary policy decisions.

The central bank last week raised its inflation forecasts to 3.5% in 2024 and 3.1% in 2025. It attributed these higher figures to a tighter output gap, rising oil prices, foreign exchange rate depreciation, and lower expected future interest rates by the market, the minutes showed.

It also cited ongoing fiscal concerns, global disinflation fears, and the perception that the central bank could become more lenient in fighting inflation over time as factors contributing to the divergence in inflation expectations from official targets.

Policymakers said the reduction of expectations would come through “firm conduct” to regain credibility and strengthen the reputation of institutions and economic frameworks, at a time when President Luiz Inacio Lula da Silva’s target of eliminating the primary budget deficit next year is viewed with skepticism due to its reliance on booming public revenues.

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