Brazil central bank chief flags March 2024 inflation outlook as 2023 worsens

People walk in front the Central Bank headquarters building in Brasilia
People walk in front the Central Bank headquarters building in Brasilia, Brazil March 22, 2022. REUTERS/Adriano Machado

BRASILIA, Aug 15 (Reuters) - Brazil's central bank chief on Monday defended policymakers' focus on 12-month inflation through March 2024 over the 2023 year-end rate due to one-off tax changes, contributing to signals that the bank may be done raising interest rates.

Central Bank President Roberto Campos Neto said the slightly longer horizon improved policymaking, as tax breaks on essential goods this year are expected to create an "inflation remnant" in 2023 when they expire.

An aggressive cycle of rate hikes has lifted Brazil's benchmark Selic rate to 13.75% this month from a 2% record low in March 2021. Along with that latest increase, the central bank began emphasizing the new early-2024 forecast, in contrast to its expectations for 2023, which had worsened.

In the minutes from the policymakers' rate-setting meeting, they said the 3.5% inflation seen for the 12 months through March 2024 was "consistent" with the strategy of inflation converging to target over the relevant horizon.

"We preferred to act in the time dimension, saying: Look, this quarter has this influence, we will look ahead a little," Campos Neto said at an event hosted by Instituto Millenium. "We made this adjustment understanding that it improved our reaction function."

Despite leaving the door open for a smaller "residual" rate hike in September, the central bank dropped firmer guidance used in prior meetings when further hikes were clearly penciled in.

Policymakers forecast 4.6% inflation next year, against an official 3.25% target - more optimistic than private economists' expectation of 5.38%, according to a weekly central bank survey.

Campos Neto attributed the difference in the projections to different interpretations of the accumulated effect of monetary tightening already carried out.

"The market ends up having a much higher correlation between 2023 expectations and current data than we would have," he said.

Reporting by Marcela Ayres; Editing by Brad Haynes and Grant McCool

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