By Marcela Ayres
(Reuters) -Brazil’s central bank has left the size of its upcoming interest rate hike in May open and remains unable to gauge it, citing a still-uncertain economic outlook and inconclusive signs of cooling activity in Latin America’s largest economy.
The message was conveyed on Thursday by two central bank directors during events hosted by Brazilian institutions on the sidelines of the IMF and World Bank Spring Meetings in Washington.
Brazilian policymakers raised interest rates by 100 basis points for the third consecutive time in March, bringing the benchmark Selic rate to 14.25%, fully adhering to a forward guidance they had issued in December.
The bank signaled a further, albeit smaller, hike for May, but stopped short of specifying its size, unlike previous instances when it explicitly indicated that 100 basis-point increases were appropriate.
Speaking at an event hosted by brokerage XP, the bank’s economic policy director Diogo Guillen said that policymakers must be “extra cautious” and “more flexible” in the face of heightened uncertainty, as the current environment clouds interest rate guidance.
Also speaking at a sideline event in Washington, on Wednesday, monetary policy director Nilton David said he was skeptical about providing forward guidance due to the uncertainty in between meetings, which could have an impact on domestic inflation.
Paulo Picchetti, the bank’s director of international affairs, emphasized at an event hosted by lender Itau later in the day that policymakers have left the outcome of May’s monetary policy meeting open and there is little more he can say about future decisions given the current environment.
“There are very important elements that will impact our decision about which you don’t have a clear picture yet,” he said.
Picchetti also acknowledged that two key variables of the current tightening cycle remain unclear – its total size and duration.
“Both are open now. They will be analyzed and communicated through time in the best manner for us to believe that they can shift expectations towards the (inflation) target we have a mandate to achieve,” he said.
Picchetti stressed that domestic economic indicators can be interpreted in various ways and that “none of them, I believe, presents a clear trend for us to base decisions.”
According to Guillen, there is no concrete evidence of an economic slowdown in the country, noting that signals vary significantly across different sectors.
He said the central bank’s previous language referring to “incipient signs” of moderation remains an appropriate way to describe the current situation.
Guillen defended the effectiveness of the bank’s monetary policy and said its reaction function remains stable, with decisions based on the same factors whether in tightening or easing cycles.
“It’s a world of high uncertainty,” said Guillen.
“When you have less uncertainty, you can provide more visibility and have a better commitment. When you have higher uncertainty, you commit less and incorporate more the data,” he added.
Guillen said that in the central bank’s latest analysis ahead of its policy decision, the only point of consensus among all members of the rate-setting board was their discomfort with inflation expectations.
He noted that while expectations remain unanchored, they are now more stable than last year, when they were drifting further from the official 3% target.
Guillen also pointed to persistently high and sticky services inflation, saying it feeds into the bank’s models and implies a more positive output gap.
(Reporting by Marcela Ayres; Editing by Gabriel Araujo; editing by Diane Craft)
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