Brazil’s Copom signals rate hike end

Brazil’s Copom signals rate hike end

Brazil Economy & Policy


Photo source: Egil Fujikawa Nes for Connection Consulting

Indications that Brazil’s monetary tightening cycle has ended intensified on Thursday, when the central bank underscored its view that inflation will moderate in the months ahead.

Brazil’s monetary policy committee, Copom, suggested a conditional pause in rate hikes, in minutes of its most recent meeting, which were released on Thursday.

Copom raised rates 25bp on April 2, to 11%, the second consecutive hike of a quarter of a point, after six increases of 50bp each.

“The minutes added an entire new paragraph that we consider on balance dovish and that reads like the testimonial of a central bank that wants to justify ending the current cycle despite the recent acceleration of inflationary pressures,” said Goldman Sachs analysts.

Inflation hit 0.92% in March, above market expectations, according to data released this week. That could moderate to 0.83% in April, although food price inflation is likely to stay, macroeconomists at Itaú said on Thursday.

Barclays, in contrast, said food price rises would moderate and that inflation could fall to 0.7% in April. That trend, together with a strengthening exchange rate, could give Copom “more comfort” to keep rates at 11% at its next meeting in May.

“Our reading of the minutes of the last monetary policy meeting is that the Copom is, in fact, signaling a pause, but conditioned on inflation retracing from the high levels observed in March,” the investment bank said in a note after the meeting minutes were released.

Not everyone was so convinced. Worse inflation data for April could push Copom to lift rates again, by 25bp, on May 28, Goldman Sachs analysts said in a research note on Thursday.

“Given the intensity of the underlying inflationary pressures, in our assessment, at this juncture BRL appreciation, rather than supporting ending the cycle in May, simply reduces the likelihood that the hiking cycle will have to be extended beyond the May meeting,” the bank said. LF