Brazil’s Central Bank Warns of Inflation Risks

The Brazilian government expects economic growth to reach around 3.5% in 2024, but the Central Bank of Brazil has noted the first signs of moderation in recent data.

On Tuesday, the central bank emphasized that slowing economic activity is crucial to bringing inflation back to target. It highlighted inflation expectations becoming unanchored and an overheating economy as very relevant risks to price stability.

USD/BRL

“The slowdown in aggregate demand is an essential element in restoring balance between supply and demand in the economy and ensuring inflation converges to the 3% target,” the bank stated in the minutes of its latest monetary policy decision.

After raising interest rates by 100 basis points last week to 13.25%, and signaling another hike in March, policymakers also noted that market perceptions regarding the government’s fiscal framework and debt sustainability continue to weigh significantly on asset prices and inflation expectations.

Outlook and Market Reactions

Looking ahead, the central bank stated that it will closely monitor economic activity, the exchange rate transmission following recent currency depreciation and volatility, and inflation expectations, which have further deteriorated and remain a key factor in determining future inflation trends.

Morgan Stanley’s Perspective

Morgan Stanley noted that Brazil’s central bank (BCB) raised its benchmark interest rate by 100 basis points to 13.25% and maintained its projection for another hike in March, with the possibility of additional adjustments in May. The bank highlighted that monetary policy remains restrictive due to ongoing concerns over inflation expectations.

On the political front, Morgan Stanley pointed out that Congress is expected to resume activities in early February, with a strong focus on budget discussions and tax reform.

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Ignacio Teson
Ignacio Teson
Economist and Financial Analyst
Ignacio Teson is an Economist and Financial Analyst. He has more than 7 years of experience in emerging markets. He worked as an analyst and market operator at brokerage firms in Argentina and Spain.
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