Brazil’s Central Bank’s observation that early interest rate cuts will further recede.
2023-03-28
■ The Brazilian Central Bank (BCB) has held five consecutive meetings to maintain the policy interest rate unchanged at 13.75%
■ Reducing interest rates will require "slowing down price growth" and "deepening cooperation between the Brazilian Central Bank and the Lula government", but the situation is deteriorating
The Central Bank of Brazil (BCB) kept its policy interest rate unchanged at 13.75% for five consecutive times at its Monetary Policy Committee (COPOM) meeting, which ended on March 22nd. However, in the statement, the wording "maintaining interest rates unchanged for longer than expected by the market" was deleted, and it was stated that monetary easing in the financial markets was expected to subside soon.
There are two main points about whether the Brazilian central bank will lower interest rates. In other words, (1) price trends and (2) deepening cooperation with the Lula government. However, as shown below, it is difficult to say that the situation has improved since the Lula government took office earlier this year. In March, COPOM's decision to maintain the policy interest rate unchanged met the expectations of the financial market, but speculation of an early interest rate cut has subsided.
(1) In February, the inflation rate of the Consumer Price Index (IPCA) announced on March 10th was 5.60%, which slowed for eight consecutive months compared to the previous year. However, BCB's 2023 price target ceiling (4.75% year-over-year) is still rising. The Brazilian Central Bank has also raised its inflation expectations for this year and the next two years to 5.8% and 3.6%, respectively, from 5.6% and 3.4% in November last year. In addition, on the basis of emphasizing the role of inflation expectations, the Brazilian Central Bank also pointed out that long-term inflation expectations, in particular, have further deteriorated. Brazil's central bank has stressed that if inflation does not slow as expected, it may resume raising interest rates.
(2) China believes that the continued confrontation between the Brazilian Central Bank and the Lula government has led to a decrease in speculation about interest rate cuts in the financial market. President Lula immediately criticized the BCB's decision the day after the COPOM results were released (March 23). "BCB must pay the price of high-interest rates," he said. Finance Minister Haddad also criticized the BCB's policy stance in a way that echoed the President. On the other hand, the Brazilian Central Bank also threatened to raise interest rates, restricting the Lula government. In addition, he has always believed that the uncertainty in the fiscal policy management of the Lula government will reduce the efficiency of monetary policy and may become an obstacle to interest rate cuts.
In the future, at the monthly National Monetary Review Conference (CMN), attention will be paid to whether a plan to raise inflation targets will be announced (next time on March 30th). There is a view that the Lula government will urge the Brazilian Central Bank to lower interest rates by raising inflation targets. Given the structure of the CMN, this makes it easier for the government's proposals to be adopted. If the CMN raises its inflation target, it is likely that early interest rate-cutting observations in the financial market will resume.