Incoming Governor Gabriel Galipolo of Brazil’s central bank indicated that policymakers are unlikely to deviate from their current guidance of two consecutive 100 basis point interest rate increases, countering investor expectations of even more aggressive hikes.
Galipolo emphasized the clarity and transparency of the central bank’s recent guidance, issued during last week’s policy meeting, which aims to establish a more restrictive monetary policy stance. He commended the board members for their courageous message and their clear understanding of the intended direction for monetary policy.
“Modifying the current guidance would require significant justification,” Galipolo stated to reporters in Brasilia on Thursday. “Signaling the intended course of action for the next two meetings was crucial.”
Following Galipolo’s remarks, interest rate futures declined as investors tempered their expectations of a nearly two percentage point hike in January’s policy meeting. Market concerns partially stem from anxieties about the government’s ability to implement substantial spending cuts and strengthen public finances. Earlier that day, the central bank also revised its economic growth forecasts upward for both this year and the next, further solidifying the board’s commitment to raising borrowing costs to combat inflationary pressures arising from overheated economic activity.
According to the quarterly inflation report released on Thursday, the central bank now projects a 3.5% GDP growth for this year, marking the fourth consecutive upward revision from the previous estimate of 3.2%. In comparison, analysts polled by the monetary authority anticipate a 3.42% economic expansion in 2024, while the government’s forecast stands at 3.3%.
The central bank’s GDP growth projection for 2025 has also been revised upward to 2.1% from the previous estimate of 2%.
Brazil’s economy, the largest in Latin America, continues to defy expectations with its resilience to high interest rates. Public spending is fueling economic activity, but simultaneously fueling market concerns about a potential debt crisis.
Looking ahead to next year, board members anticipate stronger agricultural production. They characterized Brazil’s economy as “robust,” with cyclical activities exhibiting “strong growth,” according to the inflation report.
The Brazilian real has been under pressure as skepticism mounts regarding President Luiz Inacio Lula da Silva’s commitment to bolstering government finances. The announcement of a plan to reduce spending by 70 billion reais ($11.1 billion) over two years, coupled with tax breaks for low-income workers, reinforced the perception that the president is prioritizing growth through consumption.
Central bankers noted in the report that analysts anticipate the government will miss its fiscal target next year and believe the spending cuts will have a limited impact on public accounts. They added that “the overall fiscal package does not appear to have generated a positive initial impact on analyst sentiment.”
The significant capital outflow has prompted central bank intervention in the currency market, with the monetary authority selling $8 billion in the spot market alone on Thursday. Outgoing Governor Roberto Campos Neto, speaking alongside Galipolo, confirmed the atypical nature of these outflows and reiterated that policymakers intervene in the foreign exchange market when signs of dysfunction emerge.
The Brazilian real remains the weakest performer among major currencies, having depreciated by approximately 21% this year. Central bankers highlighted in the report that the “sharp” exchange rate depreciation is exacerbating price pressures. Furthermore, policymakers anticipate higher-than-expected food prices will contribute to annual inflation remaining above the bank’s 3% target.
Analysts surveyed by the central bank project annual inflation will significantly exceed the 3% target through at least 2027. A weaker exchange rate intensifies consumer price pressures by increasing the cost of imports.
In conclusion, the Brazilian central bank remains committed to its current course of action, prioritizing the control of inflation through two planned interest rate hikes. Despite market pressures and concerns surrounding fiscal policy, the bank is steadfast in its objective to maintain price stability. The resilience of the Brazilian economy amidst high interest rates and the impact of external factors, such as currency fluctuations and global commodity prices, will continue to be key areas of focus for policymakers.
