Brazil Central Bank Holds Rates, Flags Increased Inflation Expectations

Brazil's central bank kept interest rates unchanged for the fifth consecutive policy meeting on Wednesday, citing a continued rise in inflation expectations and weakening bets of monetary easing beginning anytime soon.

The bank's rate-setting committee, known as Copom, maintained its Selic benchmark interest rate at 13.75%.

The decision, which defied intense pressure from the new government of President Luiz Inacio Lula da Silva to reduce borrowing costs, matched the expectations of all 30 respondents in a Reuters poll.

"Taking into account the uncertainty of the scenarios, the committee remains vigilant, assessing if the strategy of maintaining the Selic rate for a long period will be enough to ensure the convergence of inflation," policymakers wrote in the bank's weekly survey. They dropped the reference to maintaining the rate beyond the period expected by the market.

"The Committee emphasizes that it will persist until the disinflationary process consolidates and inflation expectations anchor around its targets, which have shown additional deterioration, especially at longer horizons," they added.

Several economists expected the central bank to mention challenges to the global economy, which could potentially create space for rate cuts to begin earlier than previously anticipated, after high-profile U.S. bank closures and the Credit Suisse rescue.

The central bank acknowledged the worsening global environment amid banking turmoil, but emphasized recent data on global activity and inflation have remained resilient.

The bank also noted the process of monetary policy tightening in major economies continued to advance, following the Federal Reserve's decision to continue raising U.S. interest rates.

"Given the expectation, I found the statement to be more hawkish," said Gustavo Arruda, Director of Research for Latin America at BNP Paribas.

"It will probably decrease the probability of interest rate cut scenarios in the next policy meetings," he added, predicting rates unchanged until May next year.

While policymakers emphasized the government decision to resume fuel taxes has helped to improve public accounts, they said highly volatile financial markets and long-term inflation expectations beyond their targets "require further attention when conducting monetary policy."

Inflation has cooled to 5.6% in the 12 months through February, but it is still far above this year's 3.25% official target. Meanwhile, the central bank's inflation expectations have risen to 5.8% for 2023 and 3.6% for 2024. Next year, the target is 3%.

Lula has repeatedly called for lower borrowing costs, describing the current Selic rate "irresponsible" on Tuesday.

The president also put off a proposal for new fiscal rules to keep a lid on public debt levels - one of several upward inflation risks flagged by the central bank at recent policy meetings.