Brazil Rates Stay High as Inflation Resists

Brazil's central bank maintains that the economy is slowing, yet inflation remains a persistent issue, leading to prolonged high borrowing costs. Despite a slowdown in economic activity, primarily due to cyclical sectors, the Copom, Brazil's monetary policy committee, has decided to keep the Selic interest rate at 13.75% for an extended period.

The last meeting on November 4th saw unanimous agreement on this decision. The committee anticipates a "sharper moderation" of activity, mainly in sectors reliant on credit, which may help curb price shocks to other areas. However, inflation in Brazil, measured by the IPCA, stands at 4.58% over the past year, exceeding the target range of 3% to 4.5%.

Factors contributing to inflation include higher oil prices, El Niño, the end of Brazil's six-day work week, and a weaker real currency. The committee warns that these shocks could persist, requiring high policy rates to stay effective beyond what would typically be necessary. While the committee leaves open the possibility for a rate cut, they caution against reacting to early effects of the existing shocks, reserving stricter measures for potential second-round effects.

The committee also highlights concerns over public debt and reforms, suggesting these could raise the neutral rate, a level that neither accelerates nor decelerates the economy. In the aftermath of the meeting, the Brazilian real weakened by 1.6%, trading at around 5.60 per US dollar, affecting both Brazilian investors in bonds and US travelers to Brazil.

Market forecasts for future rate decisions remain uncertain, with Polymarket pricing a no-change scenario at 91.5%, a 0.25-point decrease at 6.2%, and a 0.25-point increase at 1.2%.