BUENOS AIRES — Brazil’s central bank will keep a wary stance next week against strong criticism from recently elected President Luiz Inacio Lula da Silva, maintaining the Selic benchmark rate at current high levels, a Reuters poll suggests.
Investors are focusing on how hawkish the bank’s policy statement will sound, and on its updated inflation forecasts, as economists seek to confirm their calls for more delays in future cuts of the Selic rate, which now stands at a steep 13.75%.
Earlier this month, Lula said the formal independence of the central bank was “nonsense” and questioned the high cost of borrowing that is stifling economic activity after 12 rate hikes in 2021-22 to battle rising consumer prices.
Officials from his administration later played down his comments. But the message of Lula, who is leading a big increase in spending that is already rekindling inflation expectations, is still reverberating among market experts.
All 30 respondents in the poll taken Jan. 23-26 saw the bank’s rate-setting committee, known as Copom, leaving its rate unchanged at 13.75% for the fourth consecutive time at the policy meeting next Wednesday.
“The ongoing de-anchoring of long-term inflation expectations combined with increased fiscal spending approved after the Copom meeting on December 7 could warrant a more hawkish tone,” Roberto Secemski, a Barclays economist, said.
“We currently expect the first rate cut to happen in September, assuming the discussion of the new fiscal framework will be well advanced in Congress by then, but see rising risks for a delay in easing due to adverse pressures on inflation.”
Notably, the number of participants who viewed the Selic staying at 13.75% in the third quarter jumped to 9 out of 23 respondents from just 3 in December’s survey, bringing the median call for that period up to 13.50% from 13.00%.
Inflation has fallen drastically from around 12.0% in April last year to 5.79% in December. However, the cooling trend in consumer prices has stopped and the reading for mid-January came in slightly above market estimates.
The official inflation target is 3.25% with a margin of plus/minus 1.5 percentage points. In his latest assessment, bank governor Roberto Campos Neto said he expected a 5.0% rate in 2023, which would surpass the goal for a third year in a row.
While he has effectively attributed the worsening scenario to potential repercussions of Lula’s fiscal plans, Campos Neto has avoided stoking further controversy, rather emphasizing the need for an autonomous central bank.
Elevated borrowing costs are seen freezing growth almost to stagnation this year in Brazil, amid an overall subdued global scenario in 2023, with risks tilted to the downside for the economy. (Reporting and Polling by Gabriel Burin in Buenos Aires; Editing by Nick Macfie)