Brazilian central bank cools talk of imminent interest rate cut

The Brazilian central bank decided on Wednesday evening to keep its benchmark Selic rate unchanged, despite heavy government pressure for a cut.

The Copom central bank rate committee also underlined that it does not plan to make any reduction in the base rate from the current 13.75% just yet.

"The committee judges that the current scenario requires patience and calmness in monetary policy. Copom emphasizes that, although a less likely scenario, it will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected," the bank said in a statement after issuing its decision.

According to analysts, the central bank will wait to see what fiscal rules are approved by congress, particularly regarding controls on government spending, before giving any signs of cutting the interest rate.

In April, the government submitted a new fiscal framework to congress, aimed at replacing the current spending limit and facilitating public investments. 

The administration proposes that growth in federal government expenditure will be limited to 70% of the projected increase in revenue for the same year, thus ensuring that spending grows more slowly than revenue and improving public finances. 

"The central bank wants to see what congress will approve in relation to the fiscal rules to see whether it will really bring greater predictability to control spending, curbing medium and long-term inflation projections," Jason Vieira, chief economist at Brazilian asset management firm Infinity Asset, told BNamericas.

"If there is congressional approval for these clear rules, it is possible to see the beginning of a cycle of interest rate cuts in August, with the Selic ending 2023 at 12.75%," he added.

The base rate has been at 13.75% since August 2022 due to central bank efforts to curb inflation. However, the insistence of the monetary authority to keep the base rate high is also affecting the country's economic performance, which has drawn the ire of President Luiz Inácio Lula da Silva.

Since Lula took office on January 1, he has aimed various attacks at central bank governor Roberto Campos Neto, who was appointed during the administration of former president Jair Bolsonaro in early 2019 and is expected to remain in the post through 2024.

Brazil's monetary authority has been independent since 2021, with the bank directors serving for a fixed term and having decision-making autonomy to avoid political interference in decisions.

Lula has already suggested multiple times that congress should review the bank's model of autonomy, but congressional leaders have so far refused to cooperate.

The high benchmark interest rate is considered one of the main factors responsible for the lukewarm economic activity expected in Brazil this year. The economy is forecast to grow only 1.0% this year, compared with 2.9% in 2022.

One of the government's main arguments for reducing the rate is that inflation is showing signs of slowing.

The official IPCA inflation index reached 4.16% in the 12 months ending in mid-April, down from 5.36% in mid-March, bringing it within the tolerance range established as a target by the central bank.

However, analysts warn that more time is needed to see how consistent the slowdown is.