Brazil Central Bank won't hesitate to hike interest rate if needed

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BRASILIA, 6th August, 2024 (WAM) -- Brazil's central bank said it will not hesitate to hike the benchmark interest rate due to a more challenging inflation outlook in Latin America's largest economy, Bloomberg reported on Tuesday.

The committee "unanimously reinforced that it will not hesitate to raise the interest rate to ensure inflation convergence to the target if it deems it appropriate," central bankers wrote in minutes to their 30th-31st July rate meeting, when they held the benchmark Selic at 10.5 percent for the second straight month. Still, holding borrowing costs steady also remains a strategy moving forward, they wrote in the document published on Tuesday.

"The Committee unanimously believes that the current stage is of even greater caution and of diligent monitoring of inflation conditioning factors, without committing to future strategies," they wrote.

Policymakers led by Roberto Campos Neto are sticking with restrictive, double-digit borrowing costs as inflation forecasts creep further above the 3 percent target. Domestic economic growth has held up and the labour market remains tight. Furthermore, the Brazilian real has tumbled over 15 percent year-to-date, fanning fears that more expensive imports will spur pressure on consumer prices.

The currency was hit by global financial market turbulence and concerns that the government is abandoning pledges to shore up fiscal accounts. Investors are also facing uncertainty on the central bank as President Luiz Inacio Lula da Silva, who has consistently criticised what he sees as exorbitant borrowing costs, prepares to name a new governor and two directors by year's end.

Policymakers have for months reinforced their commitment to tame inflation with tight borrowing costs. Still, economists fear the monetary authority will become more tolerant toward consumer prices once Lula-backed nominees become a majority of the central bank board later this year.

Annual inflation topped all forecasts in early July, accelerating to 4.45 percent after a hike in gas prices sent transportation costs soaring, according to the national statistics agency. Analysts in a weekly central bank survey published Monday raised their year-end inflation forecasts to 4.12 percent in 2024 and 3.98 percent in 2025.

Put together, traders are already pricing in borrowing cost hikes later this year.

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