Brazil Central Bank Signals Preference for Pauses in Rate-Cutting Cycle

• Brazil’s central bank signalled a preference for combining periods of pause and renewed easing to bring inflation back to its 3% target by the first quarter of 2028, arguing that delaying the convergence horizon helps avoid unwanted volatility and smaller output fluctuations.
• Policymakers said bringing inflation back to target by the end of 2027 would require abrupt changes in direction and large movements in the Selic rate, followed by several quarters of inflation below target. The bank said interest-rate paths closer to market pricing and the weekly Focus survey are more appropriate, as they avoid excessive volatility in financial asset prices and macroeconomic aggregates.
• Last Wednesday, the central bank cut the Selic rate by 25 basis points to 14.25%, marking its third consecutive rate cut, while again leaving its next steps open despite higher inflation projections. The decision steepened the yield curve as investors assessed the possibility of a pause in the easing cycle. Analysts interpreted the minutes as having a more hawkish tone.
• Policymakers also noted that monetary policy should not fully respond to price changes caused by supply shocks, which remain highly uncertain. These include effects already materialising from the Middle East conflict, as well as risks that have not yet materialised, such as the potential impact of El Niño.

(Source: Reuters)