April 16 (Reuters) – Brazil’s central bank is cautious amid uncertainties over the potential duration and consequences of the U.S.-Israeli conflict with Iran, and the final size of its interest rate adjustment cycle remains open, said a top official on Thursday.
The bank’s director of international affairs, Paulo Picchetti, said the balance of risks to inflation now appears more asymmetric than at the March meeting, when policymakers kicked off rate cuts with a 25-basis-point reduction, lowering the benchmark rate to 14.75%.
“Things have definitely not improved since our March meeting,” he said at an event hosted by lender Itau Unibanco in Washington.
At the time, when policymakers bank lowered the Selic rate after holding borrowing costs at their highest level in nearly 20 years since mid last year, they still viewed the balance of inflation risks as symmetric.
“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,” said Picchetti.
In the run-up to the April 28-29 meeting, the central bank will remain data-dependent, Picchetti said, repeatedly flagging concerns about the deviation of market inflation expectations from the 3% target, particularly at longer horizons.
According to Picchetti, the latest inflation data – 4.14% in the 12 months through March – surprised to the upside, prompting policymakers to assess whether the supply shock stemming from the geopolitical conflict is directly pushing prices higher or whether second-round effects are already materializing.
“That is a big question which we will be following closely,” he said, adding it is impossible at this stage to predict developments in the Middle East
Picchetti also stressed that the central bank is still uncertain whether the conflict could support economic growth in Brazil, as many have suggested, given that Latin America’s largest economy is a net oil exporter and should benefit from higher prices.
(Reporting by Marcela Ayres; Editing by Alistair Bell)
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