Brazil Central Bank Cuts Interest Rate Again But Inflation Worries Point to Pause Soon

1dhq9wk}ntal7jgd3f08d6o)_media_dl_2.png Brazil central bank, national st

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(Bloomberg) — Brazil’s central bank cut its key interest rate by a quarter-point for a third straight meeting while flagging a worsening inflation outlook, prompting many economists to bet its easing cycle may be halted as soon as August.

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The bank led by Gabriel Galípolo lowered the benchmark Selic to 14.25% late on Wednesday, as forecast by 31 of 34 economists in a Bloomberg survey. The remaining three expected borrowing costs to remain at 14.5%.

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In a post-decision statement many analysts viewed as ambiguous, board members said economic growth and inflation had both accelerated, warning that stimulus measures could fuel consumer price increases that are already above target. Cutting interest rates was appropriate “at this moment,” they added, but the “total magnitude of the calibration cycle” still depends on new information.

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“The new items introduced to the statement go in the direction of a pause,” said Fernanda Guardado, a former Brazil central bank director who is now chief economist for Latin America at BNP Paribas. “The easing cycle either ended, or is close to the end.”

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Brazilian central bankers are fighting rising prices with some of the highest real interest rates in the world. Even as energy costs ease following an interim Iran-US peace deal, policymakers still have to contend with the impact of the stimulus measures introduced by President Luiz Inácio Lula da Silva ahead of elections in October. Current inflation stands above their tolerance range, while cost-of-living expectations have been increasing above the 3% target.

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What Bloomberg Economics Says

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“Brazil’s central bank made a significant effort to convey a very hawkish message and still justify a rate cut that its own methodology wouldn’t back. We think that confusing communication will create noise and keep markets uncertain of policymakers’ commitment to the inflation target.”

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— Adriana Dupita, Brazil economist

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Brazil’s decision came hours after Federal Reserve officials left interest rates unchanged and signaled growing support for rate hikes this year.

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The Brazilian real slid as much as 0.8% on Thursday, falling alongside most emerging-market currencies. The so-called DI contracts maturing in 2031 rose roughly 20 basis points before trimming the advance, while short-end swap rates fell.

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The Brazil central bank decision “is making markets price cuts at the short end, but higher rates at the long end, as investors are not liking the way the monetary authority presented the case for additional easing given the macroeconomic framework it laid out,” said Marco Oviedo, a senior strategist at XP Investimentos.