Brazil central bank says rate-cut path uncertain, dependent on data

By Marcela Ayres

BRASILIA, March 24 (Reuters) - Brazil's central bank said on Tuesday the magnitude and duration of its interest rate adjustments will be set over time as new data feed into its assessments, after it delivered a 25-basis-point cut to 14.75% last week.

In the minutes from its latest policy meeting, the bank said the decision is "consistent with the current scenario, in which the duration and extent of geopolitical conflicts, as well as mixed signals regarding the pace of economic activity slowdown and its effects on price levels, hinder the identification of clear trends."

Last week, policymakers had already refrained from providing explicit forward guidance after an oil shock linked to the U.S.-Israeli war on Iran fueled global inflation fears.

"The inflationary pressure that will probably arise from higher energy costs does not seem to change the bank's flight plan too much, at least so far," said XP chief economist Caio Megale, forecasting a 50-basis-point cut in the next meeting.

But Natalie Victal, chief economist at SulAmerica Investimentos, said the minutes support expectations of another 25-basis-point cut in late April, while acknowledging the central bank has signaled a willingness to step up the pace depending on external developments.

GREATER MONETARY RESTRICTION

In the minutes, the central bank said inflation expectations had risen following the conflict, noting that in such episodes the economic cost of disinflation tends to increase over time.

"The main conclusion obtained and shared by all members of (rate-setting committee) Copom was that, in an environment of deanchored expectations - as currently is the case - greater monetary restriction is required for a longer period than would be otherwise appropriate," the policymakers said.

Even so, they noted inflation readings before the conflict showed some moderation in headline and core measures, supported by a stronger currency and more benign commodity prices.

They also flagged some cooling in services inflation, though it remains resilient amid a dynamic labor market.

"On the one hand, the interpretation persists that inflation is being driven by demand and requires a contractionary monetary policy; on the other hand, the interpretation remains that monetary policy has played a decisive role in the observed disinflation," said the minutes.

Before starting the long‑anticipated easing cycle, the central bank had kept rates at a near 20‑year high since July last year to bring inflation - 3.81% in the 12 months through February - to its 3% target.