With inflation rates taking a downturn, Brazil's central bank has declared its intent to slash interest rates. This decision comes on the heels of a period of stringent monetary measures designed to rein in inflation that had reached alarming heights. The interest rate cut is aimed at stimulating economic growth and fostering investment while keeping inflation under control. Financial markets have greeted the news with optimism, anticipating it may bolster a more robust recovery of the Brazilian economy. However, caution remains, as too swift changes in monetary policy could destabilize the economy and undo progress made in combating inflation.
Brazil's Inflation Trends
Brazil's annual inflation was slightly above market expectations in mid-November but remained at a safe distance from the central bank's upper target range, likely allowing for further interest rate cuts. The IPCA 15 consumer price index stood at 4.84% for the year to mid-November, above the 4.82% at the end of the last month and surpassing the 4.80% forecast in a Reuters poll of economists.
Monetary Easing Cycle
The central bank retained its benchmark rate at a six-year high of 13.75% for almost a year following 1,175 basis points of hikes before embarking on a monetary easing cycle in August. To date, the monetary authority has made three 50 basis point rate cuts and signaled it should maintain the pace and slash borrowing costs another 50 basis points at each of its upcoming two meetings.
Consumer Price Hike
According to the IBGE, consumer prices in Brazil rose 0.33% in the run-up to mid-November compared to 0.21% the previous month, exceeding the 0.30% economists had anticipated. The rise was primarily due to an increase in food and beverage prices. Personal expenses and transportation prices also climbed during the month due to higher travel-related items such as hotel prices and airfares.
As inflation trends downward, analysts anticipate another 50 basis point cut in the Selic rate by the Central Bank at its next meeting scheduled for December 12th. As 2024 progresses, the easing of monetary policy will continue in the context of slower economic growth. Lower inflation will also be sustained in a stable exchange rate scenario as the market expects the dollar to trade around 5 reais in the coming months, slightly above its current level. Brazil will close a positive 2023 in economic terms, which also impacts the political scene by consolidating Lula's government in the first year of his third term.