Brazil's BCB Continues Easing Cycle in January, Signals More Cuts to Come

  • In its latest meeting on January 31, the Banco Central do Brasil (BCB) cut the benchmark rate by 50 basis points to 11.25%; as inflation continues towards the target range (3%), and signalled further rate cuts to come.
  • The decision made unanimously, marked a cumulative reduction of 250bps since the beginning of the easing cycle in August 2023. The central bank took this step as inflation continued easing, with the latest headline inflation reading coming in at 4.6% y-o-y for December.
  • While this is above the BCB’s inflation target of 3.0%, it is on track to fall into the target band (1.5-4.5%) in the months ahead.
  • For the upcoming March 31 meeting, Fitch expects a further 50bps reduction to 10.75%, driven by moderate inflation and slowing growth, though stable US rates will preclude a larger cut.
  • Fitch sees a further 200bps reduction to a 9.25% benchmark rate by end-2024. Though this is slightly above consensus, Fitch does expect the bank will keep easing amid a further slowdown in inflation and growth.
  • Risks to the outlook are balanced. The primary upside risk involves inflation potentially remaining high due to Brazil’s robust labour market, external pressures from Middle East tensions and fiscal policies. On the downside, a more aggressive Federal Reserve policy shift, with cuts being either deeper or sooner than anticipated, could potentially allow the BCB to reduce rates more rapidly.
  • Unlike their US and European counterparts, Latin America’s central banks led the monetary policy tightening wave, as inflation spiked in the post-pandemic recovery. They are now leading the reversal of the interest rate cycle, with central banks in Brazil, Peru, Mexico, Colombia, and Chile already cutting their benchmark rates.
  • These sovereigns have noted declining inflation levels, all of which have been tending to their respective targets and have begun cutting rates to shore up their economies as growth has slowed or turned negative. Consequently, for Latin American central banks, the question over the next few months will be how fast and by how much they will cut interest rates as they balance the risks to inflation and navigating a soft landing. 

 (Source: Fitch Solutions and NCBCM Research)