(Bloomberg) -- Brazil’s central bank said annual inflation will run above the tolerance range for the next six months, as food prices rise significantly and services costs remain elevated despite aggressive interest rate hikes.
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There will be a target breach with June 2025 inflation under the new framework, central bankers wrote in the minutes to their Jan. 28-29 policy meeting, when they stuck with prior guidance and lifted the Selic to 13.25%.
Short-term inflation, a weaker currency and economic resilience “still require” more restrictive rates, they wrote in the minutes published on Tuesday.
Policymakers wrote their guidance for another rate hike of one percentage point in March was still appropriate. “Beyond the next meeting, the total magnitude of the tightening cycle will be determined by the firm commitment of reaching the inflation target,” they added.
Policymakers led by Gabriel Galipolo are trying to bring down annual inflation that in early January stood at 4.5%, the top of the tolerance range. Food is quickly becoming more expensive and service prices are proving resistant to higher borrowing costs. Complicating matters further, domestic demand is getting a boost from low unemployment and persistent government spending.
Short-term inflation is “adverse” on factors including higher meat prices and industrial goods costs that are under pressure from a depreciated real, they wrote.
What Bloomberg Economics Says
The Brazilian central bank’s hawkish meeting minutes signaled policymakers remain wary of the inflation outlook and won’t shy away from further tightening if necessary. Recent changes to the board and a shift in downside inflation risks at the January gathering raised concerns of a more dovish tilt, so this commitment will be in sharp focus — stopping hikes before a material improvement in inflation expectations could dent the BCB’s credibility.
— Adriana Dupita, Brazil and Argentina economist
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Back in December, central bankers said a more difficult economic outlook would force them to hike borrowing costs to 14.25% by March. Board members have raised interest rates by 2.75 percentage points since September.
“The minutes were harsher. There’s a change in the writing that justifies a shock from rates,” said Marianna Costa, chief economist at Mirae Asset. “They clearly showed there is inflationary pressure that requires restrictive policy.”