Brazil's central bank signaled in its latest minutes that it favors a strategy combining intermittent pauses and further rate cuts to pull inflation back to the official 3% target by the first quarter of 2028. Policymakers argued that lengthening the timeframe for convergence helps avoid unnecessary volatility in the economy and financial markets.
The documents showed that scenarios adopting this approach - pauses interspersed with renewed easing - produced smaller fluctuations in output, according to the minutes. By contrast, the bank said paths that would ensure convergence by the end of 2027, its current relevant horizon, would require "abrupt changes in direction and of large magnitude in the Selic rate, followed by several quarters of inflation below the target."
Last Wednesday the central bank lowered the Selic rate by 25 basis points for the third meeting in a row, taking the policy rate to 14.25%. Even after the cut, policymakers kept future moves open, despite upward revisions to inflation projections.
The decision to ease again steepened the yield curve. In the minutes, the bank explained that seeking to bring inflation to the target over the fourth quarter of 2027 would likely push inflation below the official goal in the immediately following quarter - a period that will serve as the reference horizon for the next policy meeting in August. The central bank noted that this dynamic affected how it communicated its policy stance.
Some market participants read the central bank's messaging as providing cover for continued easing in a more challenging inflation backdrop. The minutes acknowledged that price pressures are not only shaped by global developments, such as the conflict in the Middle East, but are also influenced by domestic fiscal stimulus measures introduced by President Luiz Inacio Lula da Silva's government as he moves toward an October re-election campaign.
Policymakers said that, for the moment, interest rate paths closer to those implied by the central bank's weekly Focus survey and by market pricing are preferable. Such trajectories, they argued, are less likely to induce excessive volatility in financial asset prices and in macroeconomic aggregates - volatility that could be counterproductive to the goal of returning inflation to target.
The minutes also reiterated a standard monetary policy principle: central banks should not fully offset price movements arising from supply shocks, given the high uncertainty that surrounds such shocks. The minutes cited both already materializing supply effects - for example, those linked to the Middle East conflict - and risks embedded in projections that have not yet materialized, such as the potential impact of El Nino.
The central bank's discussion highlights a trade-off between the timing and magnitude of rate moves and the short-term stability of output and financial markets. By favoring a stretched convergence horizon, officials signaled a willingness to use a combination of pauses and gradual easing rather than large, abrupt shifts in the Selic rate.
Separately, the minutes and subsequent market reaction underline how external shocks and domestic policy choices are weighing on the inflation outlook and on the central bank's policy calculus as it prepares for its next decision in August.