By Marcela Ayres
BRASILIA, Nov 10 (Reuters) – Brazil’s central bank said on Tuesday that worsening inflation prospects despite slowing growth reflected four supply shocks: higher oil prices, El Niño-related pressures, the impact of ending the 44-hour work week and a weaker currency driven by domestic policy uncertainty.
The assessment came in the minutes of last week’s meeting, when policymakers halted an easing cycle and kept the benchmark Selic rate at 13.75%.
The bank said weaker domestic demand and growth projected below potential could help contain the risk of the shocks spilling over into broader and more persistent inflation.
“Given these signals, we are reiterating our call for the Selic rate to remain at 13.75% through at least the end of 2027,” said ABC Brasil bank in a note to clients.
The central bank’s remarks come as major banks have sharply downgraded their growth forecasts for next year, with many now expecting the economy to expand only marginally amid tight financial conditions and expectations that interest rates will remain elevated for longer.
The outlook deteriorated after President Luiz Inacio Lula da Silva’s surprise reelection on October 25 triggered a broad market selloff.
The Brazilian real weakened sharply, long-term borrowing costs jumped and stocks tumbled as investors questioned the prospects for fiscal adjustment sufficient to stabilize public debt under the leftist leader, who has also pledged new spending measures.
Under Lula’s current term, Brazil’s gross public debt has risen by more than 10 percentage points to 82.9% of GDP.
The minutes also struck a more pessimistic tone on economic activity, with policymakers warning that the moderation in domestic growth “may intensify, according to more recent high-frequency indicators.”
“The results of surveys on retail performance indicate a turning point, particularly in the segments that are more sensitive to credit,” the central bank said.
“This is expected in a context of a restrictive monetary policy that keeps interest rates on non-earmarked credit at very high levels for both household and corporate sectors.”
Policymakers also pointed out that headline and underlying inflation measures had accelerated and risen above the upper limit of the target range, while inflation expectations had moved further away from the 3% target.
(Reporting by Marcela Ayres;Editing by Ros Russell)
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