Brazil's central bank points to more interest rate cuts ahead

Brazil's central bank cut its benchmark Selic interest rate for the fifth time in a row on Wednesday and indicated that more reductions are on the way.

The monetary authority cut the Selic rate by 50 basis points to 11.25% and underlined that if the current benign inflation scenario continues, it will make similar reductions in upcoming decisions.

"The [central bank rate] committee members unanimously anticipate further reductions of the same magnitude in the upcoming meetings and consider that this pace is appropriate to maintain the necessary contractionary monetary policy for the disinflationary process," the bank said in a statement.

"The committee emphasizes that the total magnitude of the easing cycle over time will depend on the evolution of inflation dynamics, especially components sensitive to monetary policy and economic activity, inflation expectations, particularly longer-term ones, their inflation projections, the output gap, and the risk balance," it added.

Brazil has maintained high interest rates in recent quarters in an effort to contain inflationary pressures, which has had significant knock-on effects by increasing the cost of financing projects in all sectors.

"Brazil has a very extensive agenda of auctions and concessions for the coming months and currently I would say that the main challenge for the success of this agenda is companies and investors obtaining financing at more favorable rates, which is why the reduction in interest rates should benefit the advancement of this agenda," Alberto Sogayar, a lawyer specialized in infrastructure contracts and partner at law firm Sogayar e Alcântara Advogados, told BNamericas.

After the central bank decision and statement, analysts project that the Selic will be reduced again in March and May at the meetings of the central bank's rate committee (Copom).

"We expect the Copom to cut the Selic rate by 50bp at the two next two meetings (Mar-24 and May-24)," Alberto Ramos, an economist at Goldman Sachs, said in a research report. 

The monetary authority started the current monetary easing cycle in August 2023, when the rate was at 13.75%, as inflation began to slow.

The country's official inflation index (IPCA) reached 4.47% for the 12 months ending in mid-January, the most recent figure available, down from 4.72% in the 12 months ending in mid-December.

The interest rate cut in Brazil generates positive effects on the perception of economic agents. Last year, Brazil's economy is thought to have grown 3% and this year it is expected to expand less than 2%. 

Despite the slower growth, economic agents have a generally positive perception as lower interest rates will have particular benefits for the industry and services sectors. Much of the economic growth seen last year in Brazil was thanks to a record harvest in the agricultural sector, while many other sectors were limited by the interest rate.

Earlier this week, in its January World Economic Outlook, the IMF revised its forecast for Brazil's economic growth to 1.7% this year from the previous 1.5%.