2023-08-03 15:44:00
The central bank of Brazil cut its benchmark interest rate by 50 basis points more than expected, following the months-long crusade of President Luiz Inácio Lula da Silva once morest the high costs of borrowing.
Monetary policy makers led by Roberto Campos Neto on Wednesday lowered the Selic reference rate to 13.25%, as forecast by only 11 of the 41 analysts surveyed by Bloomberg. Another thirty projected a reduction of less than 25 basis points.
Brazil’s inflation slowed below target in June
The Brazil’s surprising move comes just days following Chile cut its rate by more than economists expected. Mexico and Peru are expected to launch similar easing campaigns by the end of the year. Meanwhile, developed economies that were late in the fight once morest inflation are not yet out of the woods. Last week, the Federal Reserve and the European Central Bank left the door open for further hikes at their upcoming meetings.
Inflation in Brazil is now below the current target, and core price indicators are also improving. Estimates for cost-of-living increases have fallen since the government’s decision in June to keep inflation targets unchanged, removing a source of uncertainty for investors. Even so, those forecasts remain above target through 2026.
“Central bankers will have to be careful now not to rush into their rate cuts, because they risk unanchoring inflation expectations and ultimately hurting the economy,” said Natalie Victal, an economist at asset manager SulAmérica Investimentos Dtvm, before the announcement.
Since taking power in January, Lula has pointed to high interest rates as the main obstacle to the country’s economic prosperity, often mentioning Campos Neto in his criticism. Key members of Lula’s Workers’ Party, as well as some top business executives, have echoed his complaints.
Meanwhile, there has been progress on proposals that may improve Brazil’s fiscal prospects, as congress is expected to resume debate on a bill to shore up government finances and another to overhaul its tax system. Lula’s economic team says the approval of this legislation will clear the way for looser monetary policy, although investors are still gauging its ultimate impact on public spending.
Wednesday’s decision was the first attended by new board member Gabriel Galipolo, Lula’s former deputy finance minister and considered by many to be the next central bank chief following Campos Neto’s term ends in 2024.
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