Brazil's Central Bank Sees Cooling Economy but Keeps Rates Restrictive

Brazil's central bank on Tuesday released minutes from its latest rate-setting meeting, revealing that while tight monetary policy is increasingly dampening economic activity, inflation remains driven by strong demand. The bank therefore sees the need to maintain a restrictive interest rate stance.

The meeting delivered a fourth consecutive 25-basis-point cut, bringing the Selic rate to 14.00%. In the minutes, policymakers expressed a more favorable view of both inflation and growth dynamics but again avoided signaling the next steps in the easing cycle.

The committee stated it will continue to incorporate new information and monitor developments to keep monetary policy "adequately restrictive" to ensure inflation converges to the 3% target. It also stressed the need to watch for potential second-round effects from supply shocks and to act decisively if they emerge, while streamlining earlier references to the inflationary impact of the U.S.-Israel conflict with Iran.

On economic activity, the bank noted recent indicators point to a deceleration in the transition from the first to the second quarter, affecting both supply and demand components. This cooling is seen as essential for bringing inflation back to target.

The minutes also acknowledged a slowdown in both headline and underlying inflation, a notable shift from June when policymakers had highlighted accelerating price pressures.

Regarding longer-term market inflation expectations, the committee said it is "closely monitoring" the recent deterioration and discussing possible causes, without elaborating. It added that "perseverance, determination, and serenity" in policy conduct will help reanchor expectations and achieve the inflation target at a lower cost.