Brazil's central bank signals need for higher rates for longer

By Marcela Ayres

BRASILIA (Reuters) -The Brazilian central bank's economic policy director Diogo Guillen said on Thursday that when inflation expectations are unanchored, as they are now, interest rates need to be higher for longer.

Guillen and central bank chief Gabriel Galipolo both stressed that the bank's next policy steps depend on data, during a news conference discussing a new projection for consumer inflation to approach the official 3% target only in the third quarter of 2027.

The central bank's weekly market survey shows an even more pessimistic outlook, with private economists forecasting inflation above target through 2028.

"When inflation expectations are unanchored, interest rates need to be higher, as we are seeing, and for longer," said Guillen.

Last week, policymakers raised interest rates 100 basis points to 14.25% and signaled a smaller hike at their next policy meeting in May amid the "continuation of the adverse scenario for inflation convergence, the heightened uncertainty and the lags inherent to the ongoing monetary tightening cycle."

Galipolo said the central bank avoided more precise guidance on the size of the next rate increase to maintain flexibility in its decision-making.

"There are still unanchored inflation expectations, current inflation running above target, and a series of challenges for the central bank to address. That's why we have not ended the tightening cycle," Galipolo said.

"A range of indicators will determine whether the dosage of the remedy is appropriate."

He noted that Brazil is moving into a level of monetary tightening "with some security," even for those who project a higher neutral interest rate.

After the Brazilian real gained nearly 8% against the U.S. dollar this year - following a more than 20% plunge in 2024 - Galipolo said the country has benefited from investors seeking a carry trade in Latin America's largest economy.

He also noted that there appears to be a market view that, in the event of a tariff shock, Brazil could be less affected than its emerging-market peers.

The central bank has no near-term plans to alter its policy of rolling over foreign exchange swap contracts, he stressed.

"We don't usually adjust two levers at the same time," he said, noting the monetary policy tightening still underway.

(Reporting by Marcela Ayres; Editing by Richard Chang and Deepa Babington)

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