Brazilian analysts suggest that the recent actions announced by U.S. President Trump against Canada, Mexico, and China could lead to a surge in currency-related inflation in Latin America's largest economy, complicating the central bank's interest rate forecasts.
While the central bank of Brazil noted inflation risks remained high and raised its key rate by 100 basis points last week, it also acknowledged the potential for lower price pressures due to a less inflationary scenario for emerging economies resulting from shocks in global trade or financial conditions.
Expressing concern over the escalating trade tensions, two former Brazilian central bank directors, speaking on condition of anonymity, criticized the policy statement, noting it appears even more misguided given the current circumstances.
Reflecting on the situation, one former director highlighted, The outlook is clearly inflationary for Brazil, with risks of the country being targeted for tariffs, impacting further currency devaluation. Another former official warned of a possible global economic downturn as a consequence of the imposed tariffs by Trump.
Brazil's currency, the real, which depreciated over 20% last year, significantly contributing to inflation, experienced initial losses against the dollar on Monday. However, it rebounded slightly after Trump agreed to temporarily suspend the tariffs.
Economist Marcio Estrela, a former central bank official, emphasized that the recent developments have undermined the hopes for a more relaxed inflationary environment in emerging markets. He anticipated that if the tariffs are fully enforced, they could spark inflation in the U.S. and reduce the likelihood of a Fed rate cut.
In complete agreement with the central bank, Carla Argenta, chief economist at CM Capital, pointed out the escalating tariff threat and its potential impact on Brazil's economic landscape. She stressed that while Brazilian policymakers recognize the risk of increased inflation due to external factors, they do not see it as the most probable scenario.
The Brazilian central bank declined to comment, with the minutes from the recent policy meeting set for release on Tuesday.