By Paulo Trevisani and Nicholas G. Miller
Brazil's central bank cut interest rates for the second straight month as growth slows and the country's economy faces inflation headwinds from the conflict in the Middle East.
The bank's monetary committee, or Copom, cut the Selic benchmark lending rate to 14.5% from 14.75%. The monetary authority indicated that its future rate decisions remain unclear, given the uncertain impacts of the Iran war.
It said caution is needed so that "future steps of interest rate calibration can incorporate new information about the depth and duration of the conflicts in the Middle East, as well as their direct and indirect effects over time on the price level," Copom said.
"This scenario requires caution from emerging market economies amid heightened volatility of asset and commodities prices," the central bank said.
In March, Copom cut rates for the first time in nearly two years.
Further rate cuts represent a dilemma for Brazil's central bank, as high borrowing costs threaten economic growth while sticky inflation limits its ability to ease monetary conditions. Its next rate decision is scheduled for June 17.
Consumer prices rose 4.4% in the 12 months through mid-April, accelerating from 3.9% in the previous period, the country's statistical agency IBGE said Tuesday. The central bank targets 3%, with a tolerance range of 1.5 percentage points. Analysts surveyed weekly by the institution forecast inflation at 4.9% at the end of this year, with the coveted center of the range being reached only in 2029.
Brazil's gross domestic product is forecast to expand 1.9% this year, slowing from 2.3% in 2025. Unemployment remains at a relatively low 5.8%.
"Regarding the domestic scenario, the set of indicators continues to show, as expected, a trajectory of moderation on economic growth, while the labor market still shows signals of resilience," Copom said Wednesday.
The committee indicated that further cuts will depend, in large part, on how energy price increases stemming from the war in Iran will impact overall inflation.
"The central bank is not only concerned now with the effects of an oil shock, but possible effects that higher input costs will have on the chain, on food prices," said Gustavo Sung, chief economist at Suno Research. He still believes a cut in June is more likely than not, "but it will depend a lot on the conflict," he said.
Lofty borrowing costs are taking a toll on consumers, said Camila Abdelmalack, chief economist at Serasa Experian, a São Paulo-based consumer and commercial credit reporting agency.
The firm's corporate clients have reported that nearly 82 million Brazilians missed a payment on a loan or bill as of February, a historic high, as household budgets were squeezed by inflation and high interest rates.
Central bank data indicate that defaults among individuals and corporations reached 4.3% of total outstanding credit in the financial system in March, rising one percentage point in 12 months.
"The average Brazilian has 74.6% of their income committed to paying debt," Abdelmalack said.
She expects monetary easing to take time. "We have a cautious view regarding interest rate cuts."
The administration of President Luiz Inácio Lula da Silva has announced measures to reduce indebtedness, including a new debt renegotiation program. Analysts warned that it could have the side effect of fueling consumption and, as a result, reducing the chances of fast monetary easing.
Rising government spending--which tends to intensify ahead of general elections scheduled for October--combined with price pressures stemming from the war in Iran, puts the central bank in a tough spot, she said.
Expectations for the year-end Selic rate have increased to 13% from 12.5% a month ago, in the central bank's survey.
Write to Paulo Trevisani at paulo.trevisani@wsj.com. Write to Nicholas G. Miller at nicholas.miller@wsj.com.
(END) Dow Jones Newswires
04-29-26 1840ET
