Brazil Central Bank Slows Pace of Interest Rate Cuts as Board Members Clash in Split Vote

(Bloomberg) -- Brazil’s central bank cut its interest rate by a quarter-point, slowing its easing pace in a split vote that exposed rifts between members nominated by President Luiz Inacio Lula da Silva and more hawkish directors.

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Policymakers led by Roberto Campos Neto lowered the benchmark Selic to 10.5% late on Wednesday as expected by most analysts surveyed by Bloomberg. What surprised investors was the extent of the divided vote tally, with all four of Lula’s appointees backing a larger cut of 50 basis points.

In a statement, board members agreed monetary policy should remain restrictive and reinforced that the outlook requires greater caution. Still, they refrained from providing guidance on next month’s rate decision, adding to evidence of a rupture among the bank’s top brass.

“It shows that there’s a difference in views on how monetary policy should be conducted even though there’s consensus among all board members that it needs to remain restrictive,” said Carla Argenta, chief economist at CM Capital.

Campos Neto warned investors last month that a “big repricing” in global assets increased uncertainty to the point that the central bank could no longer remain committed to its guidance for an additional half-point reduction at Wednesday’s decision. There are risks the Federal Reserve will hold its interest rate high for longer as the US economy remains firm. Locally, the weakening of next year’s key fiscal goal rekindled spending concerns among investors.

In subsequent public appearances, directors Gabriel Galipolo and Ailton Aquino — both of whom backed a larger cut — refrained from reinforcing the message, sparking speculation that not all board members were in agreement.

Read More: Under Lula, Doves Are Rapidly Gaining Power in the Central Bank

Fiscal Policy

In Wednesday’s statement, central bankers removed language that they had repeatedly used to signal the size of future monetary easing.

Instead, they noted that, “with special emphasis, that the extension and adequacy of future changes in the interest rate will be determined by the firm commitment of reaching the inflation target in the relevant horizon.”

Policymakers wrote that they are “closely” following recent developments in Brazil’s fiscal policy. “The Committee stresses that a credible fiscal policy, committed to debt sustainability, contributes to the anchoring of inflation expectations and to the reduction in the risk premia of financial assets, therefore impacting monetary policy,” they wrote.

Those remarks came after the government opened the door for more spending in 2025 by saying it will aim for a balanced primary budget — which excludes interest payments — instead of a surplus. On top of that, devastating floods in southern Brazil are now increasing pressure for outlays even further.

Board Behavior

Locally, overall economic activity and the labor market have been stronger than expected, board members wrote. At the same time, the global outlook has become more adverse because of “heightened and persistent” doubts on when the Federal Reserve will start its own easing cycle, they wrote.

“In spite of the number of votes in favor of a half-point cut, the message of the statement was tough,” said Tatiana Pinheiro, an economist at Galapagos Capital. “I don’t see the board accelerating the pace of cuts again at coming meetings.”

In their statement, central bankers raised both their 2024 and 2025 inflation estimates to 3.8% and 3.3%, respectively. They also reiterated that several measures of underlying prices remain above the 3% target.

Annual inflation eased to 3.77% in mid-April, as service costs increased less than in the previous month. Still, policymakers have said they remain concerned over possible price pressures stemming from a strong labor market.

Analyst inflation estimates also remain above the bank’s goal through 2027 as investors assess changes to monetary policy driven by Lula’s growing influence over the bank’s board.

The bank’s decision on Wednesday could revive political tensions, as Lula prods his cabinet for proposals to juice economic growth while many allies continue to criticize Campos Neto for not loosening monetary policy fast enough.

For investors, it will also heighten concerns that greater changes are in store by year’s end, when terms for Campos Neto and two other board members will end.

“Financial markets should now speculate over how the central bank will act starting in January with the new board composition,” said Arthur Carvalho, chief economist at Truxt Investimentos. “That uncertainty should raise inflation risk premia in all Brazilian assets.”

--With assistance from Giovanna Serafim.

(Re-casts story, adds details from central bank statement and economist comments starting in third paragraph)

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