Why Brazil's cenbank won't cut the Selic just yet

Although Brazilian inflation is easing off, observers are not expecting a lower base rate anytime soon.

The inflation index (IPCA) increased 0.61% in April, bringing the 12-month figure to 4.18%, according to statistics bureau IBGE. In March, the IPCA reached 0.71% and 4.65% for the year. The central bank's 2023 target is 3.25%, 1.75% on the lower and 4.75% on the upper limit.

Yet, April’s inflation was higher than forecast, with inflationary pressures still being widespread.

"We are still not at a sufficient level of comfort for the central bank to start cutting interest rates. The likelihood is for a reduction to start only at the central bank meeting in August, even after the approval of the new fiscal rules by congress," Andre Perfeito, chief economist at local brokerage Necton, told BNamericas.

The central bank has maintained the base rate at 13.75%. But the high rate also causes friction with the government, as President Luiz Inácio Lula da Silva has repeatedly criticized, the head of the monetary authority, Roberto Campos Neto.

Congress is debating a new fiscal framework submitted by the government, aimed at replacing a spending limit and facilitating public investments. The cap was implemented in 2017 and limits the growth of public spending to the previous year’s inflation rate.

"The approval of the new fiscal rule is closely linked to the interest rate, because only with that will we have clarity on how government expenditures will perform," said Perfeito.

The government proposal suggests limiting spending to 70% of the projected revenue increase for the current year, so spending would still grow at a lower pace than income. But the proposal also contains a public investment minimum of 75bn reais (US$15bn), adjustable to inflation.