Brazil Central Bank: Demand Still Drives Inflation

Brazil’s central bank confirmed on Tuesday that while high interest rates are beginning to drag on economic activity, persistent demand-side pressures keep inflation high, necessitating a continued restrictive monetary policy.

Monetary Policy Strategy

The minutes from the bank’s latest policy meeting—which saw a fourth consecutive 25-basis-point rate cut, bringing the Selic rate to 14.00%—revealed a more optimistic outlook on growth and inflation. However, policymakers stopped short of signaling the future trajectory of the current easing cycle.

“The Committee will continue to incorporate new information and monitor developments in the scenario in order to keep monetary policy adequately restrictive to ensure convergence to the inflation target,” the bank stated.

Monitoring Global and Domestic Risks

Board members emphasized the importance of tracking potential second-round inflation effects stemming from supply shocks. They noted the need for decisive action should these pressures materialize, specifically refining their previous focus on the inflationary impacts linked to the U.S.-Israel and Iran conflict.

Economic Cooling and Inflation Targets

Regarding domestic economic activity, the central bank observed a clear deceleration between the first and second quarters. This slowdown, which spans both supply and demand components of aggregate output, is viewed as a vital component in steering inflation back toward the 3% target.

The minutes also highlighted a positive shift compared to June, noting a slowdown in both headline and underlying inflation measures, contrasting with earlier concerns regarding accelerating price pressures.

Addressing Market Expectations

Policymakers addressed the rising long-term inflation expectations, a persistent point of concern for the committee. While they did not specify the exact drivers behind this deterioration, they confirmed they are “closely monitoring” the situation.

“Perseverance, determination, and serenity in the conduct of monetary policy will contribute to the reanchoring of expectations, which is crucial for the convergence of inflation to the target at a lower cost,” the central bank concluded.