Brazil cenbank expected to keep base rate high throughout 2023

Brazil’s central bank maintained the Selic rate at 13.75% after its first rate decision of 2023, suggesting the base rate will remain high for longer.

Although inflation has been decelerating, projections are still higher than the central bank target, while early signs from the government promoting more public spending are creating doubts about fiscal discipline. 

"The situation, which is particularly uncertain in the fiscal sphere and inflation expectations moving away from the target over longer horizons, demand greater attention in the conduct of monetary policy," the central bank said a statement.

Analysts don’t see room for a rate reduction in the next months.

"The central bank has signaled a strong commitment to the inflation target regime and seeks to see inflation returns closer to the target. This makes me expect a cut in the Selic now only toward the end of the year, in November or December, and not in the third quarter as was my previous base scenario," Luciano Rostagno, chief Latin America strategist at Banco Mizuho do Brasil, told BNamericas.

"In our assessment, the most likely scenario is for [central bank rate committee] Copom to be steady and patient and hold the policy rate at the current significantly restrictive monetary stance for a while. Consequently, we expect Copom to wait until at least 3Q23 to start to gradually cut rates, possibly later," a Goldman Sachs report said.

The central bank targets 3%±1.5% inflation this year. According to the bank’s most recent survey among 100 analysts, inflation could hit 5.74%, compared with 5.31% a month ago. In 2021 and 2022, inflation also exceeded the targets. 

Apart from higher government spending, the persistently high base rate also causes concern.

“For more than a year, the Selic has been at a level high enough to inhibit economic activity and contribute to the deceleration of inflation and the maintenance of the interest rate will intensify this deceleration. For this reason, we hope Copom will soon begin the process of reducing the Selic rate to avoid additional costs for economic activity,” the head of industry association CNI, Robson Andrade, said in a statement.

Brazil’s economy expanded 3% last year, while this year’s growth is expected at 0.8%.