Brazil Central Bank Minutes Push Back Rate Cut Bets

  • July meeting minutes cite potential of persistent high prices
  • Central bank says disinflation pace slower than desired

Brazil’s central bank says it sees no room to cut its benchmark rate as inflation hasn’t been slowing fast enough and market expectations for price increases remain above the 2017 target.

“All board members acknowledged progress in the disinflation outlook for the Brazilian economy, but expressed concern about inflation expectations,” policy makers said in minutes of their first meeting under new central bank chief Ilan Goldfajn.

The board members voted unanimously after their July 19-20 meeting to keep the Selic rate unchanged for an eighth straight time at 14.25 percent. The minutes published on Tuesday repeated the bank’s commitment to slowing inflation to 4.5 percent by the end of next year, from the 8.93 percent level recorded in mid-July.

Short-term swap rates rose while long-term rates fell as the minutes consolidated expectations that the central bank will delay the beginning of a much-anticipated monetary easing cycle. Rates on the contract maturing in January 2017 rose 4 basis points to 13.98 percent at 10:13 a.m. in Sao Paulo, while those for the January 2020 contract dropped 4 basis points to 12.17 percent.

Fiscal Uncertainty

Uncertainty about the pace of implementation of fiscal measures proposed by Finance Minister Henrique Meirelles added to the central bank’s cautious stance. All board members underscored that structural fiscal reforms are “fundamental to reduce the cost of the disinflation process.”

“The central bank wants to see more progress. It sees risks to fiscal consolidation fueling inflation,” said Rabobank’s senior strategist Mauricio Oreng. He added his bank still keeps its forecast for a rate cut in October, but sees risks that it may be further delayed.

Meirelles on Monday renewed an appeal for the approval of key austerity measures, including budget adjustments and a pension reform, saying that failure to do so would force the government to raise a tax burden that is already stifling Latin America’s largest economy.

Short-term food price pressure also added to the case for no change in monetary policy, the central bank said. At the same time, the board noted that a quick implementation of acting President Michel Temer’s proposed policy adjustments and significant slack in Latin America’s largest economy also could allow for monetary policy easing.

Along with Goldfajn, four other members joined the central bank board after Alexandre Tombini stepped down in June. The new chief has said that thorough and effective communication is a key tool for the central bank in directing market expectations.

Changes at Brazil central bank had been expected as the career public servant Tombini was replaced by the long-time market economist Goldfajn. Analysts and traders were pleasantly surprised last week by the lengthy and detailed post-meeting communique published under Goldfajn’s name in contrast to the short, terse statements issued under Tombini after interest rate decisions.

External Uncertainty

The U.K.’s decision to leave the European Union has increased uncertainty about the recovery of the global economy, although indications that top central bankers are ready to provide more stimulus contributed to stabilize financial markets, according to the minutes.

The Brazilian real also benefited from the increased appetite for risk, rallying more than 20 percent so far this year. The stronger currency already had a negative impact on Brazil’s trade performance, resulting in a wider-than-expected current account deficit of $2.5 billion in June, the central bank said in a separate report on Tuesday.

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