Three recent events indicate that the Banco Central do Brasil (BCB) has been moving in a more hawkish direction in terms of monetary policy. On 31 July it said that, after a unanimous vote in its Comitê de Política Monetária (Copom), it was leaving its Selic benchmark interest rate unchanged at 10.5%. The rate has been cut in a series of steps since January this year, but the reductions have been paused since June and some economists believe the next move may be upwards. The bank cited the need for caution due to an uncertain global outlook, greater than expected domestic growth, and continuing inflationary pressures. On 6 August the Copom minutes were published giving further background to the more hawkish tone. The committee, the minutes said, ‘will not hesitate to raise the interest rate to ensure inflation convergence to the target, if it deems it appropriate.’ Analysts described this as the strongest hawkish message the bank could give short of committing to a rate hike. Then, on 9 August the BCB published data showing that the headline 12-month inflation rate rose for the third month running in July, to reach 4.5%.

The July increase takes inflation to the top of the central bank’s target band of 1.5%-4.5% which has a central 3.0% target rate with a tolerance band of +/- 1.5%. Month-on-month data for July shows that inflationary pressures are coming back into play. Prices rose by 0.38%, driven by a spike in airfare prices (+19.39%) transport costs (+1.82%) and petrol prices (+3.15%). On the plus side, after big rises in food and beverage prices in May and June, they fell in July (-1.0%).

The interest rate outlook has become uncertain. Given the recent weakness of the Brazilian Real, which has fallen in value by 15.2% against the US dollar during this year, the cost of imports is pushing up and threatening to fuel a cycle of wider price rises. Although the BCB’s regular Focus’ survey of economists shows that inflationary expectations remain relatively anchored — the consensus is for the 12-month rate to ease to 4.12% by the end of this year — the possibility of an interest rate hike in September cannot be ruled out. The fact that the government must appoint a new BCB president to replace Roberto Campos Neto, whose four-year term in office ends in December, adds a degree of political uncertainty to the mix.

Guido Mantega, finance minister during part of Lula’s fist two terms in government (2003-2011) has praised him for temporarily pausing his anti-central bank rhetoric and his criticism of ‘too high’ interest rates. In a local media interview Mantegna said he still acts as an advisor to Lula, and in June had recommended that the president should stop attacking Campos Neto. ‘There was too much noise due to Lula’s criticism, so I thought this kind of thing had to stop’ Mantega said, adding that in his view the government will make progress on reducing the fiscal deficit. Mantega added that he supports Gabriel Galípolo, who is reported to be Lula’s preferred candidate to replace Campos Neto at the BCB bank by the end of this year. Galípolo is currently serving as monetary policy director at the central bank. 

The August 2024 issue of Brazil Focus also includes the following:

Politics

• The battle of the coalitions
• New attempt to clean up ‘secret budgets’

Taking the Pulse

• Crime data shows limited improvement

Foreign Relations

• Brazil seeks to mediate in Venezuela crisis 
• China: a solution to Brazilian de-industrialisation?
• Brazil and Nicaragua recall ambassadors

Security

• New initiative against mobile phone theft
• Tensions rise in Mato Grosso do Sul

Economy & Business

• Central Bank shifts to more hawkish position
• Lula ‘tunes it down’ on interest rates 
• Government commits to fiscal freeze
• Mixed performance by industrial sector
• Aviation Sector news
• Information and Communications Technology (ICT)
• Itaú in the black

Environment

• New worries over Amazon fires 
• Ministerial warning over carbon credit fraud

Energy Sector

• Yes to low carbon hydrogen, no to tax credits 
• Petrobras and Chinese companies win in auction
• Petrobras makes new discoveries 
• Petrobras earnings take a dive
• Brazilian elected head of International Seabed Authority