Brazil
Analysis

Brazil cenbank determined to keep base rate high

Bnamericas
Brazil cenbank determined to keep base rate high

Brazil’s central bank maintained the benchmark rate at 13.75% after its Wednesday meeting, signaling the rate will remain high, despite government pressure and deteriorating credit conditions for companies.

The central bank justified the decision with persistent above-target inflation.

"Considering the uncertainty surrounding its scenarios, the [bank] remains vigilant, assessing whether the strategy of maintaining the basic interest rate for an extended period will be able to ensure the convergence of inflation," a press release said, adding that a rate hike is also possible if inflation doesn’t fall.

"The [bank] reinforces that it will persevere until not only the disinflation process is consolidated but also the anchoring of expectations around its targets, which showed further deterioration, especially in longer terms. The [bank] emphasizes that future monetary policy steps can be adjusted and will not hesitate to resume the adjustment cycle if the disinflation process does not go as expected." 

In response, finance minister Fernando Haddad told reporters that “at a time when the economy is retracting, the [bank] even signals an increase in interest rates. We read it very carefully, but we think that the communique is very worrying.”

In recent weeks, President Luiz Inácio Lula da Silva has intensified his criticism of central bank head Roberto Campos Neto, saying that high interest rates would damage the economy.

Lula has also been criticizing the lender’s autonomy. Bank directors are serving a fixed term and make decisions free of political interference, but Lula suggested congress should review the model.

Campos Neto was appointed during the previous administration and is expected to remain in the post through 2024.

"Campos Neto would only be removed if there was a vote in congress and there is no room today in congress for a vote to remove the head of the central bank," Mário Sérgio Lima, senior political analyst at Medley Global Advisors, told BNamericas.

"The situation in political terms is negative for Lula, because a persistent high interest rate increases the chances of the first year of his administration being of very weak economic performance or even of recession," said Lima. 

A base rate reduction is only expected later in the year.

"In our assessment, the most likely scenario is for the [rate policy committee] to be steady and patient and hold the policy rate at the current significantly restrictive monetary stance for a while longer. Consequently, we expect the [committee] to wait until 2H23 to start to gradually cut rates, but given the unsettled fiscal policy outlook and drifting inflation expectations a longer wait to start easing is a distinct possibility," a Goldman Sachs report said. 

CREDIT CONDITIONS

In a press release, industry association CNI said it “believes that maintaining the interest rate is, at this moment, unnecessary to combat inflation and only brings additional costs to economic activity.”

Banks have been restricting loans since the start of the year, particularly those involving small and medium-sized companies, due to the deterioration in non-performing loan rates.

Conditions tightened even more after major retailer Lojas Americanas recently announced accounting inconsistencies of about 20bn reais (US$3.8bn) and requested bankruptcy protection.

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