Brazil's central bank intends to preserve a restrictive approach to monetary policy even after concluding what officials described as a rate calibration process, Monetary Policy Director Nilton David said on Wednesday.
At its March 17-18 meeting the central bank lowered the Selic rate by 25 basis points to 14.75%. The rate had stood at 15% since July, its highest level in nearly 20 years, a posture the bank adopted to rein in persistent inflationary pressures.
David said the institution has confidence that its policy settings are having the intended effect and that they have helped to mitigate the impact of rising credit on the economy. He linked progress toward the inflation target to the economy operating within its potential, noting that for inflation to move toward target the country must be growing at a sustainable pace.
On the growth side, the monetary policy director flagged multiple indicators pointing to activity above potential, with the labor market singled out as one such signal. He framed these domestic dynamics as an important part of the assessment that supports a continued restrictive stance, even after the modest reduction in the Selic.
David also addressed external issues. He said there is broad consensus within the Monetary Policy Committee that the war in Iran is exerting a downward effect on global GDP. In that context, he observed that the Brazilian real has not behaved differently from peer currencies amid the conflict.
Turning to inflation expectations, David cautioned that expectations can affect the real economy and reflect considerations beyond those the central bank directly factors into its decision-making. He emphasized that the bank's institutional framework is less prone to political noise than these market expectations might be.
Finally, David said there is conviction among policymakers that volatility hampers monetary policy transmission. That concern reinforces the bank's inclination to keep policy settings on the restrictive side while monitoring both domestic indicators and external developments.
Implications and context
The central bank's message signals a preference for maintaining higher-for-longer real interest rates despite a small step down in the headline policy rate. Watch areas include credit conditions, labor market trends, currency moves relative to peers, and how inflation expectations evolve.