BRASILIA (Reuters) – Brazil’s central bank signaled on Tuesday that a majority of its policymakers see a possibility of initiating a “parsimonious” rate cut at its next meeting in August, provided that a more benign inflation scenario is consolidated, while a minority adopts a more cautious stance.
The minutes of the meeting held between June 20-21, when the rate-setting committee known as Copom kept the benchmark rate at 13.75% for the seventh consecutive time, revealed a divergence of opinions regarding the signaling of future steps.
“The prevailing assessment was that the continuation of the ongoing disinflationary process, with its consequent impact on expectations, may allow the necessary confidence to be built up to start a parsimonious process of inflection at the next meeting,” said the minutes.
Although it adopted a more moderate tone by excluding the possibility of rate hikes from its policy statement, the central bank refrained from signaling monetary easing at its next meeting in August last week, pointing instead to a data-dependent stance.
The communication drew criticism from President Luiz Inacio Lula da Silva, ministers, and some market participants, who expected a notable shift in the bank’s tone due to lower-than-expected inflation, a stronger currency, and easing inflation expectations.
In addition, future interest rates fell as Congress advanced the government’s new fiscal rules, seen as crucial to curb uncontrolled public debt after Lula’s increased social spending to fulfill campaign promises.
In the minutes, the bank pointed out that some members still support the need to observe a further decrease in long-term inflation expectations and more evidence of disinflation in the more cyclically sensitive components.
The central bank stressed in the minutes that inflation expectations declined slightly, but remain deanchored from official targets, partially due to the questioning about a possible change in future inflation targets, adding that “decisions that reanchor expectations can lead to faster disinflation.”
The National Monetary Council, consisting of the Finance Minister, Planning Minister, and central bank governor, will convene on Thursday to confirm the 3% inflation targets for 2024 and 2025, and set the official target for 2026.
Lula’s earlier push for higher inflation targets to ease monetary policy has lost momentum, with Finance Minister Fernando Haddad recently emphasizing the government’s inclination to adjust the timeline for achieving the goals, favoring a continuous approach over the current calendar year-based target.
(Reporting by Marcela Ayres; Editing by Steven Grattan)
