Brazil CB signals prolonged high rates as tightening shows impact

Brazil’s central bank said on Tuesday it sees clear signs that its aggressive monetary tightening cycle is working, with the impact to broaden in the coming quarters, in a scenario that calls for high borrowing costs for an extended period.

In the minutes of last week’s meeting, when the bank raised rates by 50 basis points to 14.75 per cent and refrained from providing forward guidance, policymakers said that some factors give them confidence that growth will moderate after years of unexpectedly strong economic activity.

“The restrictive monetary policy has already had effects on the credit market, business surveys, the exchange rate market, corporate balance sheets, as well as in the moderation of certain activity and labour market indicators,” they wrote.

“In view of the lags inherent to the monetary policy mechanisms, these effects are expected to deepen in the coming quarters,” they added.

Against this backdrop, the bank reiterated that “the scenario prescribes a significantly contractionary monetary policy for a prolonged period to ensure inflation converges to the target.”

After the central bank last week dropped language about the need for a “more contractionary” stance and stopped describing the balance of inflation risks as tilted to the upside, many economists had concluded the rate-hiking cycle — which has so far lifted rates by 425 basis points — was over.

According to a weekly central bank survey, they now expect rates to remain steady in June.

The minutes showed policymakers had discussed whether the balance of risks to inflation remained slightly asymmetric, albeit less so than in the previous meeting, or whether it could already be considered neutral.

Policymakers also said new government rules for payroll-deductible loans should not be seen as a cyclical measure and may represent a structural change in the credit market, factoring in only a mild impact on its aggregate projections due to the programme.

Free trade: China and Brazil pledged on Tuesday to defend free trade and multilateralism as the two countries signed 20 agreements in Beijing to strengthen their ties amid global trade uncertainties.

The two countries should firmly oppose unilateralism, protectionism and “acts of bullying”, Chinese President Xi Jinping told Brazilian President Luiz Inacio Lula da Silva, Chinese state broadcaster CCTV reported.

Lula said the two countries’ relations had “never been more necessary”, according to footage shown on Brazilian state television.

The presidents witnessed the signing of the agreements, including highly-anticipated deals for more Brazilian agricultural exports to China.

Lula is in Beijing for a four-day official state visit and to attend a high-profile forum in Beijing along with other Latin American and Caribbean officials, including Chile’s President Gabriel Boric and Colombia’s Gustavo Petro.

Tuesday’s meeting was Lula’s third with Xi since taking office in 2023, underscoring Brazil’s warming relations with China, its largest trading partner.

At a business forum attended by Lula in Beijing on Monday, Brazil’s trade and investment promotion agency said it helped attract around 27 billion reais ($4.8 billion) of Chinese investment to Brazil.

Meanwhile Brazil’s annual inflation rate rose to 5.53 per cent in April from 5.48 per cent in the prior month, official data showed on Friday, days after the central bank hiked its benchmark interest rate to the highest level in almost 20 years due to stubbornly high inflation.

Consumer prices in Latin America’s largest economy remain well above the Brazilian central bank’s inflation target of 3 per cent with a tolerance of plus or minus 1.5 percentage points. Monthly inflation as measured by the IPCA index rose 0.43 per cent, decelerating from the 0.56 per cent growth registered in March.

Finance Minister Fernando Haddad said the reading came in line with expectations, adding he is confident that inflation will close the year “a little better” than projections. On Monday, private economists surveyed by the Brazilian central bank lowered their expectations for the country’s inflation rate in 2025 to 5.53 per cent, well above the 4.8 per cent estimate unveiled by the central bank this week.

The food and beverages category as well as the health and personal care group were the main contributors to the monthly rise, according to IBGE.

Brazil’s central bank monetary policy committee, known as Copom, on Wednesday hiked its Selic benchmark interest rate by 50 basis points to 14.75 per cent, the highest level since 2006.

Policymakers left future steps open amid global uncertainties, stressing that the current environment calls for a “significantly contractionary monetary policy for a prolonged period” to bring inflation to target.

Andre Valerio, a senior economist at Inter, said the IPCA reading for April should not impact the direction of monetary policy, given the central bank’s latest decision, which paves the way for steady rates going forward.