Brazil's central bank blames four supply shocks for worsening inflation prospects despite slowing growth. Its minutes show policymakers halted an easing cycle and held the Selic rate at 13.75%.
Brazil's central bank said 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%.
Policymakers see weaker demand as a buffer
However, 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.
The minutes also struck a more pessimistic tone on activity. Policymakers warned that the moderation in domestic growth "may intensify, according to more recent high-frequency indicators." The central bank said retail surveys indicate a turning point, particularly in segments more sensitive to credit.
Policymakers also pointed out that headline and underlying inflation measures had accelerated and risen above the upper limit of the target range. Inflation expectations had moved further away from the 3% target.
Election selloff darkens the growth outlook
Major banks have 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 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 Lula's current term, Brazil's gross public debt has risen by more than 10 percentage points to 82.9% of GDP.
Source: Economy News
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