By Marcela Ayres and Bernardo Caram
RIO DE JANEIRO (Reuters) – The global economic uncertainties that led Brazil’s central bank to halt its monetary easing cycle have persisted, preventing an interest rate cut this week, a Finance Ministry official told Reuters.
In a Friday interview on the sidelines of the G20 finance leaders’ meetings in Rio de Janeiro, Guilherme Mello said Brazil’s interest rates are far above the level considered neutral for the economy.
Nonetheless, he noted that the environment has not significantly improved since June, when the central bank held borrowing costs at 10.5% following seven consecutive rate cuts.
Mello’s comments echo the central bank’s unanimous call for increased caution when it decided to pause the easing cycle due to an “uncertain global and domestic scenario,” amid the prospect of prolonged high interest rates in the U.S. and a stronger-than-expected economy in Brazil, where inflation expectations have risen.
They contrast with leftist President Luiz Inacio Lula da Silva, who repeatedly criticized the level of interest rates and the monetary policy decisions of the central bank.
The central bank’s Monetary Policy Committee (Copom) will meet again on July 30-31.
“Copom decided in the last meeting that in light of these growing uncertainties — which evidently also unanchor domestic expectations and have affected the price of some assets, such as the exchange rate — they preferred to pause,” Mello said.
“What I observe is that this set of uncertainties still exists,” he said, highlighting doubts about when monetary easing will kick off in the U.S. and the possibility of a policy shift in Japan.
Since the latest Copom meeting, the Brazilian real has weakened more than 6% from the 5.30 per U.S. dollar that the central bank used in its inflation projections.
Market concerns about leftist Lula’s commitment to controlling public finances have also weighed on local assets, impacting the exchange rate and interest rate futures.
Amid the impasse over a lack of compensation for payroll tax relief passed by Congress, Mello said that the impact of the measure is significant enough to jeopardize the government’s goal of eliminating the primary budget deficit this year.
However, he said that the ministry continues to support Congress in seeking compensatory measures.
“We would like to balance the budget this year, but we face these difficulties. We have not yet resolved a significant amount of the revenue we were counting on, but we intend to solve this soon,” he said.
“We will continue to make progress step by step to dispel these uncertainties and create an environment that will eventually allow us to resume the cycle of rate cuts.”
(Reporting by Marcela Ayres and Bernardo Caram; Editing by Brad Haynes and Diane Craft)
Comments