(Bloomberg) -- Brazil’s central bank said all board members supported a gradual start to their cycle of interest rate hikes, falling short of explicitly backing faster increases seen by financial markets going forward.
“All members agreed to start the monetary policy tightening cycle gradually,” central bankers wrote in minutes to their Sept. 17-18 rate meeting, when they raised the benchmark Selic for the first time since 2022, to 10.75%. A more resilient economy, doubts over the effects of a strong labor market and above-target price estimates add to an outlook that demands caution, they wrote in the document published Tuesday.
Above-target inflation expectations are “a factor of discomfort shared by all” board members, they wrote. “The Committee has outlined its response function over time, making its conduct transparent, and will pursue its mandate in full.”
Policymakers led by Roberto Campos Neto kicked off a tightening campaign as activity proves more dynamic than expected and inflation estimates run well above the 3% goal. The rise marked a reversal from a prior easing cycle that the board halted in June. Traders see central bankers accelerating borrowing cost hikes to half-point increases starting in November.
Central bankers unanimously refrained from giving guidance on their next rate moves. “We are really uncomfortable with relative prices and recent movements on the rates curve,” Campos Neto said later Tuesday during an event in Sao Paulo. “Investors want guidance, but that’s not always possible.”
What Bloomberg Economics Says
“Brazilian policymakers were unanimous on a gradual start to the tightening cycle, but a lack of clarity on the path ahead in the minutes of the Sept. 18 meeting suggests there’s less consensus on the pace of future rate hikes. The overall tone of the minutes was slightly less hawkish than we expected.”
— Adriana Dupita, Brazil and Argentina economist
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Brazil’s swap rates, which reflect investors sentiment toward monetary policy, fell over 10 basis points in longer-term contracts, while the real strengthened 1.2% in morning trading.
Interrupted Process
Brazil is bucking a wave of monetary easing among both peer nations and the US, where the Federal Reserve cut rates last week. Yet, Latin America’s largest economy continues to show its resilience to high borrowing costs as gross domestic product shot past all forecasts in the second quarter of the year.
In the minutes, central bankers wrote Brazil’s consumer price outlook has worsened, given there are signs the disinflation process has been “interrupted” in recent months. A tight labor market is heightening concerns of a resurgence in price pressures, as higher wages could increase services costs.
On top of that, extreme weather and a volatile exchange rate are likely pressuring the costs of items from food at home to industrial goods, central bankers wrote in the minutes. “Greater global uncertainty and more abrupt exchange rate movements requires greater caution in the conduct of domestic monetary policy,” they wrote.
President Luiz Inacio Lula da Silva’s policies to improve living standards are boosting household income at a time of low unemployment. Most analysts see inflation at least half-point above the bank’s goal through 2027.
Brazil’s risk premium rose at the margin, as investors question the transparency of the government’s most recent revenue and expenditure figures, Campos Neto said at the event. “In our perception, the movement seems exaggerated,” he added.
Central bankers said in the minutes that they are considering a slowdown in public spending growth “over time.” Policymakers reinforced they are monitoring fiscal developments, as doubts on Brazil’s debt stabilization could raise the neutral interest rate, which neither stimulates nor restricts activity.
Annual inflation barely cooled in August, to 4.24%, as core measures excluding energy and food picked up. The bank’s own estimates show consumer price increases at 3.5% by the first quarter of 2026.
(Updates with comments from central bank governor starting in fifth paragraph, economist quotes in sixth)
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