Brazil’s central bank kicked off its rate-cutting cycle more aggressively than expected on Wednesday, reducing its benchmark interest rate by 50 basis points and signaling more of the same in the months ahead due to an improving inflation outlook. The bank’s rate-setting committee Copom cut its Selic policy rate to 13.25%, as just 10 of 46 economists surveyed by Reuters had anticipated. The rest expected a minor reduction of 25 basis points. The decision reflects growing urgency to lighten credit conditions in Latin America’s largest economy, which has been reeling from a political crisis and slowing economic growth this year.
The cut brings the Selic to its lowest level since mid-2015 when it peaked at 16.0%. That followed an unprecedented 1,175 basis point rate hike campaign to fight inflation, the world’s most aggressive monetary tightening at the time. The decision drew immediate praise from Finance Minister Fernando Haddad, who renewed calls for the central bank to reduce rates further. He said he was “not asking for anything absurd” but did not offer details on how much rates should be reduced.
In the statement, Copom said the gap between inflation and its target was still vast. It cited cooling economic activity and the stronger currency as contributing to a slower pick-up in consumer price gains than expected. However, it also pointed to supply disruptions in food and energy triggered by the coronavirus pandemic, Russia’s invasion of Ukraine, and global political uncertainties.
The bank expected inflation to remain below its target over the medium term, extending to 2024. It also noted a gradual wage increase and improved labor market dynamics. However, it added that more policy measures were needed to address the challenges of the current scenario.
The next meeting of Copom is scheduled for August. It will be the first to include Gabriel Galipolo and Ailton Aquino, President Luiz Inacio Lula da Silva’s two first nominees to the board, who are expected to boost the government’s case for lower lending rates. They joined the bank’s chief Roberto Campos Neto in voting for the 50-basis-point cut. They may also help persuade other board members to follow suit at the next meeting, scheduled for Sept 5. The move comes as Lula pushes for higher credit availability to boost investment and growth. He has repeatedly criticized Campos Neto, a former leftist member of Lula’s administration, for keeping borrowing costs steady despite falling inflation. In April, the federal court overseeing the central bank ruled against Lula’s plans to reform Brazil’s banking system to make credit more available. The ruling has not yet been appealed.
