Latin America: Brazil holds rates despite president’s attack

Brazil’s president criticised its central bank’s decision to hold policy rates, while Chilean rate-setters also held, and Costa Rica’s cut after inflation fell drastically.

Brazil: The Central Bank of Brazil’s board voted unanimously to hold its Selic policy rate steady at 13.75% for the seventh consecutive meeting on June 22.

Brazilian president Luiz Inácio Lula da Silva criticised the decision, saying on social media the board was “fighting with Brazilian society”. Lula, who has frequently criticised the central bank, said Brazil was in an “irrational” situation, with 72% of citizens in debt.

The board’s policy statement said it anticipates an increase in headline inflation in the second half of the year. Core inflation figures are also “above the range compatible with meeting the inflation target”.

The fall in prices was decelerating, while there was “an environment of deanchored inflation expectations”, the committee said.

Brazil’s headline inflation fell from a peak of 12.1% in April 2022 to 3.9% last month. This was within the central bank’s target range for 2023, of 3.25%, plus or minus 1.5 percentage points. However, the central bank projects 5% inflation for 2023 in its reference scenario.

The committee also expressed “residual uncertainty” about the government’s fiscal policy. Congress’s lower house overwhelmingly approved the spending rules last month, capping expenditure increases at between 0.6% and 2.5% plus the rate of inflation.

Lula has also criticised a 2021 law granting independence to the central bank and fixing the terms of the governor and board.  On June 20, Rui Costa, his chief of staff, called for amendments to allow the president to remove the central bank governor.

Chile: The board of Chile’s central bank continued to hold rates in a split decision on June 19, but said it would probably loosen policy soon. The board voted 3–2 to maintain the key rate at 11.25%, in its first split decision since the September 2022 monetary policy meeting.

Central Bank of Chile governor Rosanna Costa was one of the three voting in the majority, while deputy governor Pablo García and Stephany Griffith-Jones voted for a 50bp cut. 

In their policy statement, board members said “the most recent evolution of the economy points in the required direction”, as inflation fell. “If these trends continue, the MPR [policy rate] will start a downward process in the short term.”

Chile most recently raised rates in October 2022, bringing them to their highest level since 1998. It began raising them from their pandemic floor of 0.5% in July 2021.

Headline inflation fell to 8.7% in May, down from a peak of 14.1% last July, but above the central bank’s 3% target. Core inflation has fallen by a lesser amount and more slowly, to 9.9% in May, the board said.

María Teresa Vial, president of the Santiago chamber of commerce, commented the decision “doesn’t surprise the markets, but worries us”.

Francisca Pérez, the chief economist of Bci bank, told La Tercera: “At the moment we expect [a cut] in the range of 50bp–75bp for July, although we do not rule out that it could be 100bp”.

Costa Rica: The Central Bank of Costa Rica reduced its policy rate by 50bp, to 7%, on June 14, its third cut of the year. It has cut its key rate by 200bp in its last three consecutive decisions.

Inflation has fallen rapidly in Costa Rica, reaching 2.4% in April and 0.9% in May, the latter figure being below the target range of 3% ±1%. Core inflation was 2.5%.

In its statement, the central bank’s board acknowledged the sharp fall in inflation was partly down to base effects. It estimates headline inflation will remain below the 2% lower bound for the rest of the year.

The board said it “does not discount we may see negative year-on-year changes in the short term”. But it forecast inflation should rise above 2% in early 2024.

Analysts polled by the central bank put inflation at 4% at the 12-month horizon and 3.7% at 24 months.

The Costa Rican Chamber of Industry complained the central bank is acting with “excessive prudence and gradualness”. The colón has appreciated by 26.4% against the dollar over the last year, leading to protests from parts of the private sector.

Another business lobby said tight monetary policy and the strong colón “would generate a climate that would provoke the closure of businesses and job losses”.