MNI BCB WATCH: BCB Seen Hiking the Selic Rate By 25BP

MNI (BRASILIA) - The Central Bank of Brazil is widely expected to hike its official Selic rate by 25 basis points to 10.75% Wednesday, amid concerns over a stronger-than-expected economy, rising inflation expectations, and currency depreciation. 

Second quarter GDP growth of 1.4% pointed to an economy growing faster than potential, and members of the Monetary Policy Committee, Copom, have adopted a hawkish tone which analysts say signals the start of a hiking cycle. The real has depreciated by about 12% against the dollar so far year, falling to as low as 5.75 to the greenback in July amid concerns over government spending.

The BCB is likely to start with a 25bp hike to 10.75%, though a deeper 50bp increase cannot be ruled out, former BCB deputy governor for economic policy Mario Mesquita told MNI. Other former officials agreed, with the former secretary of industry and commerce development at the Ministry of Economy, Caio Megale, anticipating a short tightening cycle while former BCB deputy for international affairs Tony Volpon warned that a "dovish hike" could mean more hikes have to be made in the long run. (See MNI INTERVIEW: BCB To Begin Short Hiking Cycle -Megale and MNI INTERVIEW: BCB 'Dovish Hike' Could Backfire - Volpon)

The effects of a Federal Reserve rate cut expected this week could condition the pace of BCB tightening later this year, depending on its effects on the real and on inflation expectations in Brazil, according to Megale.

A contrary view came from former deputy governor for international affairs Alexandre Schwartsman, who said in an interview that the BCB is likely to maintain the Selic rate unchanged this year, though the chances of a rate hike have increased as the inflation outlook worsens. (See MNI INTERVIEW: BCB To Hold Rates For Now Despite Worse Outlook)

In July, Copom unanimously decided to hold the Selic at 10.5% for a second consecutive meeting, offering no forward guidance but maintaining a data-dependent stance and insisting that it would hike if necessary. (See MNI INTERVIEW: Mesquita Sees 25BP BCB Hike, 50 Not Ruled Out)

The last data release before the monetary policy decision showed that the IPCA inflation measure fell -0.02% in August, down from 0.38% in July and the first negative rate since June 2023, according to data from the Brazilian Institute of Geography and Statistics (IBGE) last week. On an annual basis, prices rose by 4.24%, down from 4.50% in July.