BRASILIA, June 19 (Reuters) - Brazil's central bank chose on Wednesday to halt a rate-cutting cycle started last August, citing higher inflation expectations and market reaction to Brasilia's struggles to balance the federal budget while U.S. rate cuts look more distant.
The bank's rate-setting committee, known as Copom, held the Selic benchmark interest rate at 10.50% in a unanimous decision. In a Reuters survey of 40 economists, 34 predicted the pause, while six had projected a cut of 25 basis points.
"The Committee unanimously decided to interrupt the easing cycle," said policymakers in their decision statement, adding that "resilient economic activity, an increase in its own inflation projections and deanchored expectations require greater caution."
All eyes were on the policy meeting after President Luiz Inacio Lula da Silva said on Tuesday that the central bank policy was the only "thing out of place" in Brazil, resuming
direct criticism
of bank chief Roberto Campos Neto.
Many saw the remarks as pressure on board members to support a rate cut as Lula considers who will succeed Campos Neto, who was appointed by former President Jair Bolsonaro and whose term ends in December.
In May, policymakers had already slowed the pace of monetary easing with a 25-basis-point cut after six reductions of twice that size. May's Copom decision was a tight split, with Lula's four picks on the nine-member committee voting for a larger cut.
The division pushed market inflation expectations away from the 3% official target — a move
highlighted as concerning
by central bank's representatives. Analysts raised concerns that once Lula has named a majority of the board next year, the central bank could be more lenient in fighting inflation.
At this meeting, however, all Copom members voted to hold interest rates, including monetary policy director Gabriel Galipolo, seen as a frontrunner to replace Campos Neto.
The decision came against a backdrop of higher market inflation expectations for this year, 2025, and 2026. Brazil's currency has also weakened this month, shaken by the prospect of U.S. borrowing costs staying high for longer while the government struggles to balance public accounts, with Lula insisting that he will not let fiscal discipline harm the poor.
"The Committee monitors closely how the recent developments on the fiscal side impact monetary policy and financial assets," wrote Copom in its statement on Wednesday.
Market jitters have been reflected in higher long-term interest rate futures compared to August 2023, when the central bank kicked off rate cuts that lowered borrowing costs from a six-year high of 13.75%.
The dimmer outlook has come despite Brazil's improving economic prospects this year, with 12-month inflation falling even as labor market numbers have been stronger than expected.
Consumer prices rose 3.93% in the
12 months to May
, compared to 4.61% in August. Historic flooding in southern Brazil has added to uncertainty about whether that trend will continue.
The central bank raised its inflation projections to 4.0% this year and 3.4% for 2025, up from 3.8% and 3.3% previously, based on market forecasts for interest rates.
Policymakers also introduced an alternative scenario with steady interest rates, yielding inflation projections of 4.0% in 2024 and 3.1% next year. (Reporting by Marcela Ayres Editing by Brad Haynes)
