Brazil's central bank just made its fourth straight rate cut, but the message underneath was more cautious than the move itself.
Policymakers trimmed the benchmark Selic rate by 25 basis points to 14% at their Aug. 5 meeting. Since March, they have now delivered a cumulative reduction of 100 basis points, a full percentage point of relief for borrowers.
The minutes from that meeting, released by board members led by Gabriel Galípolo, show a committee that believes its tight policy is finally working. But they also show a group that is not ready to declare victory.
The numbers are moving in the right direction. In early July, the yearly price increase had cooled to 4.52%, down from 4.8% a month earlier and below what economists had forecast.
Monthly consumer prices rose a tiny 0.07%. Food and beverage prices actually fell 0.67% for the month, and clothing dropped 0.66%.
That is real progress, and the central bank knows it. The minutes say monetary policy is "gradually accumulating" its effects, with economic activity losing momentum. Services and industrial output are both weakening, which is exactly what a central bank wants to see when it is trying to cool prices down.
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Outlooks for consumer prices in early 2028 still sit above the 3% goal. A survey conducted on Aug. 10 shows that economists surveyed by the bank project a 3.8% increase in prices by late 2028. When people expect higher inflation down the road, they tend to act in ways that make it come true, which is why the bank says those "deanchored expectations" require tighter policy for longer.
The bank is also watching outside forces. Supply shocks from the Middle East conflict and El Niño weather are pushing prices up in ways the bank cannot control. It says it will watch for "second-round effects," which is central bank speak for the danger of those temporary shocks turning into permanent price increases.
There is also the Federal Reserve to consider. If the Fed turns more hawkish, meaning it keeps rates higher for longer, the dollar could strengthen against Brazil's real. That would make imports more expensive and push inflation up again.
The recent easing still leaves borrowing costs high as the central bank tries to cool demand. With inflation running above target and expectations slow to adjust, the committee is likely to keep policy tight even as it trims rates in small steps.
Ahead of the October election, President Lula has injected billions of dollars into stimulus measures to spur consumer spending, which is keeping domestic demand alive even as the broader economy cools. The labor market is tight, unemployment is falling, and wage growth is moderate. That mix of stimulus and a strong job market gives the central bank reason to stay careful.
Goldman Sachs economist Alberto Ramos says the mid-September meeting is "live" for another Selic cut, meaning it could go either way. But he also sees limited room for significant further easing. Bloomberg Economics' Adriana Dupita says the minutes "didn't add much" beyond the bank's post-meeting statement, but they do leave the door open for more cuts if inflation keeps cooperating.
Brazil is in that delicate middle stretch where inflation is cooling but not conquered. The central bank is cutting rates, but slowly and with its hand on the brake. For investors in Brazilian assets, the path forward depends on whether those inflation expectations start moving toward the 3% target on their own.
If they do, more cuts follow. If they do not, the pause button gets hit. Either way, the bank has made clear it will not rush.
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