MNI: BCB Rate Hike Unlikely But Not Off The Table-Ex-Officials

Despite expectations that Brazil's central bank will hold its official Selic rate at 10.50% until the end of the year, the possibility of raising interest rates again is not entirely off the table, two former deputy governors told MNI, though others insisted that this remains unlikely.

The BCB kept borrowing costs steady last month for the first time after nearly a year of aggressive easing. The unanimous decision by the monetary policy committee Copom contrasted with a split vote in May when four members called for a 50-basis-point reduction, against the 25-basis-point cut delivered.

Since then, inflation expectations have risen to 4.05% for 2024, up from 3.96% on June 17, according to the BCB Focus market survey released Monday. For 2025, the forecast increased to 3.90% from 3.80%.

The real has also faced recent volatility, hitting a low of 5.68 to the dollar on July 2, from around 5.00 at the beginning of the year, after President Luiz Inacio Lula da Silva criticized the central bank for keeping rates high and cast doubt on his government's capacity to achieve a zero fiscal deficit target for 2024 and 2025. Spending cuts announced by Finance Minister Fernando Haddad have since brought some stability, and it traded at 5.58 Monday, from 5.45 at the time of the last Copom meeting.

WORSE OUTLOOK

Amid the worsening economic scenario, former BCB deputy governor for international affairs Tony Volpon told MNI that the possibility of raising rates this year is not entirely ruled out.

"The exchange rate volatility primarily reflects the perception of fiscal deterioration and doubts about the future management of monetary policy," he said, pointing to the end of Governor Roberto Campos Neto's mandate on Dec 31.

The new governor, yet to be appointed, will take office on Jan 1, 2025, with current Monetary Policy Deputy Gabriel Galipolo seen as the most likely candidate to replace Campos Neto. (See MNI INTERVIEW: BCB To Keep Rates High For Longer -Le Grazie)

Volpon, currently a professor at Georgetown University, said that if Copom's inflation forecasts deviate significantly from the 3% target, the Central Bank would need to respond by hiking rates. Copom's latest forecasts for inflation were 4.0% this year and 3.4% next year, on the basis of the Selic rate path extracted from the Focus market survey, which projected it at 10.50% at the end of 2024 and 9.50% in 2025.

However, the statement included an alternative scenario, with the Selic rate stable at 10.50% until the end of next year, leading to an inflation rate of 3.1% in 2025, closer to the 3% target.

HAWKISH GALIPOLO

In comments interpreted by some investors as hawkish, Galipolo said last week at a public event that the recent unanchoring of inflation expectations is a concern, and noted that the board opted not to provide any forward guidance, "keeping all alternatives open" for the next meeting on July 31.

On the other hand, former BCB deputy for monetary policy Luiz Fernando Figueiredo told MNI he believes that raising rates is "very far" from the main scenario. "Depending on fiscal developments and the choice of Campos Neto's successor, I believe Copom will keep interest rates at 10.50% until the end of the year," the current board president at Jive Investments opined.

Another former deputy governor, who declined to be named, told MNI that the worsening exchange rate might indicate a loss of credibility by monetary policy, which could lead the central bank to raise rates soon. Two other former deputies said they don't see any willingness from Copom to hike rates and that such a move would require a much worse scenario.