MNI BCB Review – Aug 2023: Divided Committee Deliver 50BP Rate Cut

Executive Summary

• At the August 02 meeting, the Copom decided to cut the Selic rate by 50bps to 13.25%, in a split decision. The committee judged that recent improvements to the inflation scenario and outlook has provided the confidence to commence “a gradual cycle of monetary policy easing”.
• Despite the split vote, all board members agreed that future 50bp cuts are to be expected, stating that “if the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings”.
• While the decision is on the dovish side of expectations, there are plenty of hawkish elements within the statement. Three mentions of the need to persist with contractionary policy highlight that the board remain committed to achieving a consolidation of the disinflationary process and a re-anchoring of inflation expectations.
• In reaction to the decision, Finance Minister Haddad reacted optimistically, reaffirming the finance ministry’s respect for the central bank. Haddad stated that “the cut will help with expectations about the Brazilian economy and allow a replanning” and praised the “new moment” which should bolster investor confidence.
• It is worth noting that the EWZ ETF, which tracks Brazilian stocks, initially spiked 2.5% just after the decision in after-market trade, however quickly pared these gains. With forecasts now expecting a year-end rate of around 11.75%, just 25bps below the 12.00% from the latest Focus survey, any substantial BRL weakening at today’s open could be short-lived.

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MNI BCB Review - August 2023.pdf