By Marcela Ayres
BRASILIA, Nov 4 (Reuters) – Brazil’s central bank ended a run of interest rate cuts and kept borrowing costs on hold on Wednesday as it grappled with a worsening inflation outlook following President Luiz Inacio Lula da Silva’s reelection.
The central bank’s rate-setting committee, Copom, unanimously voted to keep its benchmark Selic rate at 13.75% — one of the highest among the world’s big emerging economies — having cut it steadily since March.
The decision had been expected by 33 of 48 economists polled by Reuters.
Policymakers raised their inflation forecasts, said price growth risks appeared tilted to the upside amid rising inflation expectations and dropped a reference to the likelihood of future rate cuts that had appeared in their previous statement.
They reiterated their pledge to keep monetary policy “adequately restrictive” to return inflation to target.
But they also highlighted a “more pronounced deceleration of domestic economic activity” and described the current level of their benchmark rate as “substantially contractionary.”
The challenging outlook required “serenity and caution” with monetary policy, the statement added.
William Jackson, chief emerging markets economist at Capital Economics, said the committee had hinted that it might eventually resume the easing cycle. “But the government will need to take tangible steps to tighten fiscal policy and reduce inflation expectations,” Jackson said.
LEAVING ITS OPTIONS OPEN
Former central bank director Fabio Kanczuk said the Copom had left its options open but he did not see a rate cut at its next meeting.
“That would require a very clear fiscal announcement from the government, and nothing like that is coming now. The plan is to stay on hold, see how fiscal policy evolves and how markets react.”
Lula has yet to announce his plans for controlling public spending and his choices for finance minister and other key posts.
Sources close to the president said he is expected to reaffirm his commitment to fiscal discipline in a televised address on Sunday, though without outlining specific steps.
Wednesday’s central bank decision follows a sharp fall in the value of Brazil’s currency as well as the country’s stock market after Lula’s surprise turnaround victory over Senator Flavio Bolsonaro in an election runoff on October 25.
Immediately before the election, investors were largely pricing in two consecutive 25-basis-point rate cuts, one in November and another next month. On Wednesday they were expecting rates to remain on hold.
Between March and September, the central bank cut rates by a total of 125 basis points, although it stressed that borrowing costs needed to stay restrictive to bring down annual inflation, which is running at 4.6%, to the official 3% target.
Investors view the central bank’s independence as key amid mounting fiscal uncertainty ahead of Lula’s fourth term.
Some prominent members of Lula’s left-wing Workers’ Party have stepped up calls for lower official borrowing costs.
During his election campaign Lula pledged only gradual repairs of the public finances to deliver primary surpluses, without detailing how he would achieve them, and he made several promises for more public spending.
The Brazilian real last week posted its sharpest weekly loss since the 2008 global financial crisis. Borrowing costs in financial markets surged while stocks suffered their steepest weekly decline since the pandemic.
Economic growth expectations have shown a marked deterioration while analysts have raised their inflation and borrowing costs forecasts.
The central bank’s policymakers raised their inflation forecast over the next 18 months to 3.5% from the 3.1% rate they saw in September.
Inflation projections for this year rose to 5.6% from 5.2% previously and for 2027 to 4.7% from 3.9%.
The worsening outlook compounds the pressure on Brazil’s public finances. Gross debt is approaching 83% of gross domestic product while interest payments have climbed to roughly 9% of GDP over the past 12 months, among the highest debt burdens across the world’s major emerging economies.
(Reporting by Marcela Ayres; additional reporting by Brendan O’BoyleEditing by William Schomberg and Sanjeev Miglani)
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