Brazil to Seize on Inflation Surprises With Another Interest Rate Cut

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(Bloomberg) — A string of benign inflation reports in Brazil has cemented market bets on another interest rate cut this month and prompted some economists to consider further monetary easing this year.

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Central bankers led by Gabriel Galípolo will lower the Selic by a quarter-point to 14% late on Wednesday, according to all economists surveyed by Bloomberg. The move would bring total easing since March to 100 basis points. The decision will be announced after 6:30 p.m. in Brasilia, along with a statement from the bank’s board.

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Brazilian inflation slowed more than expected in early July, while economic activity showed signs of moderation, giving policymakers room to deliver another rate cut and opening the door to additional easing. Economists surveyed by the central bank lowered their year-end Selic forecast to 13.75% from 14%, according to the poll published on Aug. 3. 

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Still, consumer price forecasts for the first quarter of 2028 — which is the board’s relevant horizon for monetary policy  — remain above the 3% target, and the conflict in the Middle East is looming over global energy markets, together underscoring the need for a delicate approach to easing.

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What Bloomberg Economics Says

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“A 25-basis-point cut remains the most likely outcome at this stage. I don’t expect the central bank to abandon its hawkish tone. From a credibility standpoint, it’s difficult to argue that there’s clear evidence of easing underlying inflation based on a single month’s data. Policymakers are likely to keep the door open, while maintaining their assessment that the balance of risks remains tilted to the upside.”

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— Adriana Dupita, Brazil economist

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Click here to read the full report.

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Open Door

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Since beginning the easing cycle, policymakers have avoided committing to a predefined path for rates, arguing that elevated uncertainty at home and abroad requires maximum flexibility. By shunning forward guidance, the central bank has prompted markets to recalibrate their calls after major data releases.

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“Policymakers are likely to keep the door open in case the external environment improves or incoming data become more supportive of additional easing,” said Alberto Ramos, chief Latin America economist at Goldman Sachs & Co. LLC.

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For former central bank director Diogo Guillen, now chief economist at Itau Unibanco, Wednesday’s rate cut will reflect policymakers’ view that the local outlook has become slightly more favorable, even as the external environment remains unpredictable and longer-term inflation expectations have deteriorated.

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Whether that improvement continues is uncertain. The Iran conflict is far from resolved, keeping oil prices volatile, while severe weather fueled by El Niño is raising the risk of higher food costs. A more hawkish Federal Reserve could strengthen the dollar, weaken Brazil’s real and make imports more expensive.