April 16 - Brazil's central bank is adopting a cautious stance on the remaining size of its interest rate adjustment cycle as officials monitor uncertainties tied to the U.S.-Israeli conflict with Iran, a senior official said on Thursday.
Paulo Picchetti, the bank's director of international affairs, told an audience at an event hosted by lender Itau Unibanco in Washington that the balance of risks to inflation now looks more asymmetric than it did at the March policy meeting. At that gathering, the central bank began cutting rates with a 25-basis-point reduction, lowering the benchmark Selic rate to 14.75%.
"Things have definitely not improved since our March meeting," Picchetti said.
Officials had started easing policy after maintaining borrowing costs at their highest level in nearly 20 years since mid last year. At the March meeting, the central bank's discussion framed the balance of inflation risks as symmetric. Picchetti underscored that the shift toward greater asymmetry does not automatically translate into an immediate halt to the easing cycle, but it does affect the overall scope of rate adjustments.
"I didn’t say explicitly that this would make the case, even if it becomes asymmetrical, for stopping the cycle immediately. But this is something that obviously has an impact on the total budget of the cycle," he said.
With the April 28-29 meeting approaching, Picchetti emphasized that the central bank will remain data-dependent. He repeatedly pointed to concerns over the divergence of market inflation expectations from the official 3% target, especially at longer horizons. The bank will be watching whether recent inflation signals persist or revert as new information arrives.
Picchetti highlighted that the latest inflation reading - 4.14% over the 12 months through March - surprised policymakers by coming in higher than expected. That upside surprise has prompted an assessment of whether the supply shock associated with the geopolitical conflict is directly driving higher prices or whether second-round effects are already taking hold.
"That is a big question which we will be following closely," he said, adding that it is impossible at this stage to predict developments in the Middle East.
Picchetti also noted ongoing uncertainty over whether the conflict could end up supporting economic growth in Brazil. Some observers have suggested higher global oil prices could help Latin America's largest economy because it is a net oil exporter. The central bank, he said, has not reached a definitive judgment on that potential effect.
Contextual note: The central bank's stance, as described by Picchetti, frames the remaining policy path as conditional on incoming data and the evolving balance of inflation risks in light of geopolitical developments.