Volkswacht Bodensee - Brazil holds key interest rate, no signal on easing

Citing uncertainty in the inflation outlook, the bank's monetary policy committee called for "caution and temperance" and said its eight members had voted unanimously to hold the benchmark Selic rate at 13.75 percent.

The decision was in line with market expectations.

But the central bank's hawkish language may come as a surprise to some market-watchers in Latin America's biggest economy, where inflation has returned within the bank's target range and many analysts had started forecasting a rate cut could come soon.

"The strategy of holding the benchmark interest rate for an extended period of time has proven adequate to ensure inflation returns to target," the committee said in its accompanying statement.

"The committee underlines that it will persevere until not only disinflation but market expectations return within its goals."

Brazil's annual inflation rate fell for an 11th straight time in May, to 3.94 percent -- a nearly three-year low, and well within the central bank's current target range of 1.75 to 4.75 percent.

However, the central bank remains concerned over expectations for future inflation, despite veteran leftist Lula's insistence that the level of the key interest rate is "absurd" and stunting economic growth.

Brazil has the highest real interest rate -- subtracting inflation -- in the world, according to investment management firm Infinity Asset.

But the central bank is nervous over analyst forecasts for the inflation rate to rise to 5.12 percent by the end of the year.

The economy is meanwhile outperforming expectations.

After contracting 0.1 percent in the final quarter of 2022 -- the last under ex-president Jair Bolsonaro -- it rebounded with growth of 1.9 percent in the first quarter of 2023.

Analysts polled by the central bank are now forecasting Brazil's economy will grow 2.14 percent this year, up from an average forecast of just 1.2 percent a month ago.

The central bank, which went on one of the most aggressive rate-hike cycles in the world when the inflationary impact of the Covid-19 pandemic began to hit in 2021, has held the key interest rate steady since August last year.

L.Janezki--BTB