Brazil’s central bank reaffirms easing pace amid unanchored inflation expectations

BRASILIA (Reuters) – Brazil’s central bank stressed on Thursday that despite recent downward surprises in current inflation, expectations for the coming years remain above the official target, reaffirming its intention to keep its easing pace in future policy meetings.

In its quarterly inflation report, the central bank said that inflation in the quarter ending in November came 40 basis points lower than policymakers had estimated in September. This was primarily attributed to lower-than-expected prices in regulated sectors, especially fuels, and industrial goods.

While acknowledging that this movement led the market to project a “significant decline” in inflation for this year, the central bank emphasized that “there was no significant change in the median expectations for the coming years, which remain unanchored.”

In the report, the central bank raised its own inflation projection for 2026, which had not yet been disclosed, to 3.2%, up from the 3.1% seen in September. Last week, the central bank released its inflation estimates of 3.5% for 2024 and 3.2% for 2025, with the target for all these years set at 3%.

Private economists surveyed weekly by the central bank anticipate inflation at 3.93% next year and at 3.5% in 2025 and 2026.

Against this backdrop, policymakers reiterated their plan for additional 50 basis point interest rate cuts in the upcoming rate-setting meetings, asserting that this pace is appropriate to keep the necessary contractionary monetary policy for the disinflationary process.

The maintenance of a steady outlook for its next steps, signaled since last week, disappointed some economists who saw room for larger rate cuts in the future amid a slowdown in local inflation and improvements in the global scenario.

GDP

The central bank slightly raised its economic growth forecast for this year to 3.0% from the previously projected 2.9% in September, while worsening the outlook for a 1.7% increase next year from 1.8% before.

Policymakers wrote they see “moderation in household consumption, a resurgence of investments, and the maintenance of a favorable balance in external accounts” in 2024.

Brazil’s current account deficit is set to increase to $35 billion next year from $26 billion this year, the central bank projected, influenced by a smaller trade surplus. Policymakers expect the trade balance to remain positive at $73 billion next year, down from $79 billion this year.

Regarding bank lending, the central bank forecasts a rise of 8.8% in 2024, accelerating from the 6.8% expansion estimated for this year.

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