BRASILIA (Reuters) – Brazil’s central bank said on Tuesday that given heightened uncertainty, it chose to signal only the direction of its next move, emphasizing that due to monetary policy lags, it was appropriate to indicate a smaller interest rate hike.
In the minutes of its March 18-19 policy meeting, where it raised interest rates by 100 basis points to 14.25% and signaled a smaller increase in May, policymakers also stressed that, given the adverse scenario for inflation dynamics, it was appropriate to indicate that the cycle has not come to an end.
According to the central bank, monetary tightening was deemed necessary to bring inflation back to the 3% target amid deanchored expectations, high inflation forecasts, and resilient economic activity.
The central bank noted that if its reference scenario projections hold, 12-month inflation will stay above the target’s upper tolerance limit of 4.5% for six consecutive months starting in January, leading to a target breach in June under the new inflation-targeting framework.
Looking ahead, the central bank said it would monitor economic activity as well as exchange rate pass-through following recent volatility and inflation expectations, which have shown further deanchoring and influence future price dynamics.
After President Luiz Inacio Lula da Silva’s government recently announced a series of measures aimed at boosting middle-class disposable income, including new rules to expand payroll-deductible credit for formal workers, the minutes stressed the importance of keeping monetary policy channels unobstructed.
“Monetary policy acts through different channels, including credit, leading the volume of loans to react to financial conditions and to expectations, as prospective assessments impact current consumption and investment,” policymakers wrote.
“In order to fulfill its mandate and the convergence of inflation to the target at the lowest cost, monetary policy must be able to act with all channels unobstructed.”
(Reporting by Marcela Ayres; Editing by Chizu Nomiyama)
