Brazil’s central bank said inflation remains largely driven by strong domestic demand even as higher interest rates are increasingly slowing economic activity, signalling that monetary policy will need to remain restrictive.
Minutes from the bank’s latest rate setting meeting showed policymakers acknowledging a broader slowdown in economic activity and a moderation in both headline and underlying inflation. The bank nevertheless said it would continue monitoring conditions to ensure inflation converges toward its 3% target.
The latest meeting delivered the fourth consecutive 25 basis point rate cut, bringing Brazil’s benchmark Selic rate to 14.00%. Policymakers gave no indication of the timing or pace of further cuts, saying future decisions would depend on incoming economic data.
The central bank said economic activity had begun to decelerate across both supply and demand components, with the slowdown becoming more evident between the first and second quarters. It described weaker economic activity as necessary for bringing inflation back toward target.
Policymakers also warned that supply shocks could create secondary inflationary effects and said they would respond decisively if such pressures emerged. The minutes made fewer references to the inflationary impact of the conflict involving the United States, Israel and Iran than the bank had in previous discussions.
The central bank also expressed concern over rising longer term inflation expectations, saying it was closely monitoring the deterioration and assessing its possible causes. It stressed that maintaining a steady and disciplined monetary policy would be important to restore confidence in the inflation target.
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