Brazil central bank flags oil, El Niño, labor and FX shocks behind inflation rebound
TLT•Brazil's central bank cited four supply shocks behind worsening inflation prospects and kept its benchmark Selic rate at 13.75%. Policymakers said weaker demand and below-potential growth could limit broader inflation, while inflation measures and expectations had risen.
1. Inflation risks increase
In minutes from last week's meeting, Brazil's central bank said 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 had worsened inflation prospects. Policymakers kept the Selic rate at 13.75% after halting an easing cycle.
2. Growth outlook weakens
The central bank said weaker domestic demand and growth projected below potential could contain the risk of supply shocks feeding into more persistent inflation. It also warned that domestic growth moderation may intensify, noting that retail surveys showed a turning point in segments more sensitive to credit. Headline and underlying inflation had risen above the target range's upper limit, while expectations moved further from the 3% target.
3. Markets and debt pressures
Major banks have downgraded growth forecasts for next year, with many expecting only marginal expansion amid tight financial conditions and expectations that rates will remain elevated. After President Luiz Inacio Lula da Silva's reelection on October 25, the real weakened, long-term borrowing costs rose and stocks fell as investors questioned the prospects for fiscal adjustment. Brazil's gross public debt has risen by more than 10 percentage points under Lula's current term, to 82.9% of GDP.
