Brazil's central bank won't hesitate to raise interest rates if necessary to bring inflation down to its target, minutes from its July 30-31 policy meeting showed on Tuesday.
The monetary authority called for greater "vigilance" as inflation expectations have shown further de-anchoring, and policymakers left the door open for a potential rate hike ahead, although they said they were not committed to a policy strategy.
Brazil's central bank last week kept interest rates unchanged at 10.50% for a second consecutive meeting, as expected, flagging worsening inflation expectations and recent market swings. The decision was unanimous.
The rate-setting committee, known as Copom, said it "unanimously believes that the current stage is of even greater caution and of diligent monitoring of inflation conditioning factors," according to the minutes.
"Copom unanimously reinforced that it will not hesitate to raise the interest rate to ensure inflation convergence to the target if it deems it appropriate."
Following publication of the minutes, the real strengthened 1% against the dollar and Brazil interest rate futures now price in a 62% chance of a 25-basis-point rate hike at Copom's next meeting in September, up from 43% on Monday .
"The minutes came in a lot more hawkish than the policy statement," said BNP Paribas economist Laiz Carvalho. "The central bank is effectively saying that it could hike rates, and I think the most important thing is that it is unanimous."
Inflation projections in Latin America's largest economy have been climbing and now stand at 4.12% for 2024 in the central bank's weekly survey of economists.
Estimates for 2025 and 2026 are currently at 3.98% and 3.60%, respectively, also above the bank's 3% target.
Sticky services inflation pushed up consumer prices more than forecast in the month to mid-July, recent data from statistics agency IBGE showed.
"Various measures of underlying inflation are above the inflation target in recent releases," the central bank said.
Copom said that market doubts about the Brazilian government's ability to meet its goal of eliminating its primary deficit this year have had significant impact on asset prices and inflation expectations.
The real has plunged nearly 15% so far in 2024, pressured by concerns about domestic public finances and a strong U.S. dollar. According to the central bank, the recent exchange rate moves could have "significant" inflationary impacts.
Copom reinforced that the lack of commitment to fiscal discipline has the potential to raise Brazil's neutral interest rate, with "harmful impacts on the power of monetary policy and, consequently, on the cost of disinflation."
Meanwhile, economic and labor market indicators continue to show more strength than expected, making the process of inflation convergence to the target more challenging, the policymakers added.
