Brazil finance minister denies plan to cap interest rates

Brazil's finance minister, Dario Durigan, said on Monday that the government is not studying a cap or a freeze on the Selic benchmark interest rate, and ruled out using the country's foreign-exchange reserves to hold the real steady, The Rio Times reported. He spoke a day before the central bank's rate-setting committee, Copom, opened a two-day meeting. Its decision is due on Wednesday at about 4:30 p.m. ET.

The denial followed days of market chatter about ideas attributed to the economist André Lara Resende, a co-author of the 1994 Real Plan that ended Brazilian hyperinflation. Durigan said no meeting was scheduled between President Luiz Inácio Lula da Silva and Lara Resende.

Why the rumour moved markets: under a 2021 law the central bank sets monetary policy on its own, and its board members serve fixed terms. A cap or freeze would put elected officials, rather than the bank, in charge of where rates sit. The Rio Times reported that investors treat that independence as a pillar of Brazil's credibility.

The Selic began the year at 15.00%. The bank has cut it by a quarter of a percentage point five times, most recently at its 16 September meeting, to 13.75%. Brazil's inflation target is 3% with a tolerance band, so borrowing costs remain far above the level the official goal would imply. The Rio Times reported that Durigan has described the level of the Selic as a bottleneck for the economy, and that Lula has repeatedly criticised high rates.

Reuters reported that economists raised their inflation and interest-rate forecasts after Lula's reelection.

The Rio Times cited the prediction market Polymarket, which priced an 83.8% chance that the bank holds at 13.75% on Wednesday, a 13.0% chance of a quarter-point cut and a 1.6% chance of a cut of half a point or more, with about $133,000 traded, read on Monday evening.

Brazilian assets slipped. EWZ, the US-listed fund that tracks Brazilian stocks, fell 0.9% to $32.16 on Monday and has lost about 4% since closing at $33.62 on 28 October, according to the paper's market data. The dollar traded near 5.44 reais late on Monday, little changed on the day. The Rio Times noted that no single headline explains those moves and that nothing in the data ties them to the rate-cap story alone.

A hold at 13.75% keeps Brazilian government debt among the highest-yielding in the world, the paper reported, and leaves heavily indebted retailers and homebuilders under pressure for longer.