Brazil signals policy tightening to persist after rate cut

Brazil’s central bank indicated on Wednesday that monetary policy would remain tight even after its latest 50-basis-point reduction in the benchmark Selic rate, underscoring concerns over persistent inflationary pressures.

The monetary authority trimmed the Selic to 10.75% from 11.25%, as widely expected by economists, but emphasized in its post-decision communiqué that the disinflation process remained fragile. The bank’s board reiterated that policy would stay restrictive for a sufficiently long period to ensure inflation converges to the 4.5% target by 2026.

Policy makers noted that while inflation has eased in recent months, uncertainties around food prices and services inflation could prolong the tight cycle. The bank also highlighted risks from global financial conditions and domestic fiscal dynamics, which it said warranted a cautious approach.

The decision follows a cumulative 450-basis-point increase in borrowing costs since mid-2022, aimed at curbing inflation that peaked above 10% last year. Despite recent moderation, headline inflation stood at 4.62% in February, still above the midpoint of the target range.

Economists polled by Reuters expect the Selic to fall to 9.50% by year-end, though the central bank’s guidance suggests a slower pace of easing than previously anticipated. The bank’s next policy meeting is scheduled for May 7-8.