Brazil CB signals prolonged high rates as tightening shows impact

Brazil's central bank said on Tuesday it sees clear signs that its aggressive monetary tightening cycle is working, with the impact to broaden in the coming quarters, in a scenario that calls for high borrowing costs for an extended period.

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In the minutes of last week's meeting, when the bank raised rates by 50 basis points to 14.75 per cent and refrained from providing forward guidance, policymakers said that some factors give them confidence that growth will moderate after years of unexpectedly strong economic activity.

"The restrictive monetary policy has already had effects on the credit market, business surveys, the exchange rate market, corporate balance sheets, as well as in the moderation of certain activity and labour market indicators," they wrote.

"In view of the lags inherent to the monetary policy mechanisms, these effects are expected to deepen in the coming quarters," they added.

Against this backdrop, the bank reiterated that "the scenario prescribes a significantly contractionary monetary policy for a prolonged period to ensure inflation converges to the target."

After the central bank last week dropped language about the need for a "more contractionary" stance and stopped describing the balance of inflation risks as tilted to the upside, many economists had concluded the rate-hiking cycle - which has so far lifted rates by 425 basis points - was over.

According to a weekly central bank survey, they now expect rates to remain steady in June.