Interest rates fall to 10.50% in Brazil

Brazilian monetary policy was a highlight on investors' agenda this week. In the meeting, the COPOM cut the Selic rate by 25 basis points, but the decision was not unanimous, with the four recently appointed members voting for a larger reduction. Two days later, the IBGE released the inflation data measured by the IPCA for the month of April, which came almost in line with our expectations and was considered benign.

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The April IPCA rose 0.38%, slightly above market expectations (of 0.35%) and close to our projection (of 0.37%). The year-over-year accumulation was 3.69%, below the 3.93% of the previous period. Core metrics, such as underlying services and industrial services, were in line with expectations and showed a slowdown during the period. We expect the IPCA to end the year with a rise of 3.7%.

The Monetary Policy Committee (COPOM) of the Central Bank reduced the Selic rate by 25 basis points, to 10.50% per year, in line with recent market expectations. However, the decision was not unanimous. The four most recently appointed members voted in favor of a larger cut, of 50 basis points, although they agreed with the assessment that both global and domestic scenarios require greater caution. For now, we expect another cut of 25 basis points in the Selic rate for the next COPOM meeting. We will learn more details about the decision in the meeting minutes, which will be released on Tuesday, May 14.

In March, broad retail sales declined 0.3% on a monthly basis, below our projection (2.0%) and the market projection (+0.7%). Restricted retail sales were stable (0.0%), above market expectations (-0.3%), but below our projection (0.6%). In Q1 2024, both restricted and broad retail rose 2.5%, supporting the view that household consumption is strong at the start of the year, boosted by precatory payments and the increase in the minimum wage.

The Bank of England (BoE) decided to maintain its interest rate at 5.25%. The decision, however, was not unanimous, with two votes in favor of a 25 basis point cut. Compared to the previous meeting, there was one more vote in favor of a reduction. For inflation, the authority maintained its projection for the second quarter of 2024 at 2%. For the same quarter of 2025 and 2026, the estimates were revised downwards. The GDP growth projection was revised upwards for the entire period. Regarding the next steps, the committee stated that it is necessary to maintain restrictive policy for as long as necessary.

The European Central Bank (ECB) released the minutes from its last meeting, when interest rates were kept unchanged. The document stated that, if data confirms the expected medium-term disinflation trajectory, it would be appropriate to start the cycle of cuts at the June meeting. Additionally, some members were in favor of starting reductions as early as April. However, there remained points of attention on the radar, such as U.S. monetary policy, wage dynamics, and service inflation.

The Purchasing Managers' Index (PMI) for services in China, published by Caixin, fell in April to 52.5 points, but still above 50, indicating an expansion of activity. The result again diverges from the reading from the National Bureau of Statistics of China (NBS), which showed a more intense growth pace in the sector. During the Labor Day holiday, tourist spending was below pre-pandemic levels, signaling that the Chinese economy needs the announcement of more stimulus measures to sustain household consumption going forward.

In light of the tragedy in Rio Grande do Sul, Congress approved a legislative decree project to recognize a state of public calamity, allowing federal resources to be spent outside the fiscal target. The government also announced a relief plan, with a total cost estimated at R$ 51 billion and an impact of R$ 7.7 billion on the primary result.