Brazil’s central bank signalled on Tuesday it is sticking to a cautious monetary policy stance as it faces the possible fallout from steep new US tariffs and vowed to keep anchoring inflation expectations.
Minutes from its recent policy meeting showed that interest rates must stay high for a long time to get inflation to its 3% target.
The bank has previously signalled that rates will remain elevated for a while.
The bank opted to keep rates on hold after an unprecedented tightening cycle, in which the benchmark Selic rate was hiked by 450 basis points to a near twenty-year high of 15%.
The bank said that although the overall impact of the 50 per cent US tariffs on Brazilian goods was “not yet clear,” sectoral-specific dislocations could be “substantial.”
“The macroeconomic effects remain uncertain and will depend on the course of negotiations and market perceptions of risk,” the central bank stated, adding that it is constantly monitoring how these dynamics may impact the real economy and financial markets.
Persistent inflation expectations drive policy caution
Despite some evidence of lessening pricing pressures in financial markets, the bank voiced worry that inflation expectations remain above the official target, particularly in the long run.
“There were no significant changes in longer-term projections,” the minutes read, even though inflation measurements based on financial instruments have decreased.
The committee reaffirmed its commitment to a policy framework aimed at re-establishing these expectations.
“The committee reaffirmed and renewed its commitment to reanchoring expectations and to conducting a monetary policy that supports such a movement,” according to the minutes.
This future guidance shows that the bank regards its current contractionary posture as necessary and long-term.
“The current scenario prescribes a significantly contractionary monetary policy for a very prolonged period,” the statement read.
Credit slows, labour market resilient as growth cools
The bank recognised increasing indicators of deceleration in loan markets, which reflected the impact of high interest rates.
It did, however, emphasise that the labour market remains resilient in the face of tighter financial circumstances.
“It is natural to observe mixed signals at turning points in the economic cycle,” the bank stated, emphasising the difficulty of evaluating economic statistics amid swings in macroeconomic momentum.
Policymakers stated that Brazil’s economy, the largest in Latin America, is doing basically as planned.
Slowing growth is considered a necessary adjustment to expand the production gap, which is a fundamental strategy for controlling inflation.
Outlook: long path to inflation target
The minutes depict a central bank that understands the ongoing situation of uncertainties continuing on both the domestic and global fronts.
The US tariffs compound the inflation outlook by adding fresh uncertainty for policymakers who have to be careful of second-round effects and market sentiment.
A few financial metrics suggest abating inflationary pressures, but the central bank seems committed to a tight policy setting until the market-based expectations are completely anchored.
This means that rate cuts are off the table in the short term, with the bank putting price stability over short-term growth spurts.
Brazil’s monetary authority is sounding the alarm on a much longer monetary tightrope, and neither price inflation nor foreign trade conditions will provide much relief from the settling winds of still high inflation expectations, leaving the Brazilian central bank as an anchor in a changing economy.
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