Lula gave support to Petrobras' attempt to explore the Equatorial Margin on the high seas

Brazil ends interest rate cuts as inflation expectations rise

Brazil's Central Bank decided on Wednesday to halt the cycle of rate cuts that began in August, while inflation expectations have risen. and financial markets have fallen due to difficulties in balancing the federal budget, while rate cuts in the United States seem further away.

The bank's rate-setting committee, known as Copom, kept the Selic benchmark interest rate at 10.50% in a unanimous decision. In a Reuters poll of 40 economists, 34 predicted the pause, while six had projected a 25 basis point cut.

“The Committee unanimously decided to interrupt the easing cycle,” policymakers said in their statement, adding that “the resilience of economic activity, the increase in its own inflation forecasts and unanchored expectations require greater caution.”

In May, policymakers had already slowed the pace of monetary easing with a 25 basis point cut following six reductions twice that size. Copom's May decision was a tight split, with Lula's four picks on the nine-member committee voting in favor of a bigger cut.

The split moved market inflation expectations away from the official 3% target, something central bank officials found concerning. Analysts fear that once Lula has appointed the majority of the council next year, the central bank could be more lenient in the fight against inflation.

At this meeting, however, all Copom members voted in favor of maintaining interest rates, including the director of monetary policy, Gabriel Galipolo, considered the favorite to replace Campos Neto.

The decision came against a backdrop of rising market inflation expectations for this year, 2025 and 2026. Brazil's currency has also weakened this month, shaken by the prospect of borrowing costs in the United States remaining high. for longer as the Government struggles to balance public accounts, with Lula insisting that he will not let fiscal discipline harm the poor.

“The Committee is closely monitoring the impact of recent developments in the fiscal area on monetary policy and financial assets,” Copom wrote in its statement on Wednesday.

Market nervousness has been reflected in higher long-term interest rate futures DIJF34 compared to August 2023, when the central bank initiated rate cuts that reduced borrowing costs from a six-year high of 13.75%.

Consumer prices rose 3.93% in the 12 months to May, up from 4.61% in August. The historic floods in southern Brazil have increased uncertainty about the continuity of this trend.

The central bank raised its inflation forecasts to 4% this year and 3.4% in 2025, up from 3.8% and 3.3% previously, based on market forecasts for interest rates..

Policymakers also introduced an alternative scenario with stable interest rates, which yields inflation forecasts of 4.0% in 2024 and 3.1% next year.