MNI BCB WATCH: Copom Flags Inflation Worry, No Hike Plans Yet

MNI (BRASILIA) - The Central Bank of Brazil's (BCB) unanimous decision to keep the official Selic rate at 10.50% for a second straight meeting Wednesday came as officials raised their own inflation forecasts and concern levels -- but stopped short of hinting at any plans for renewed interest rate hikes. 

The statement noted risks in both directions to the Bank's economic forecasts but also added one more factor that could put upward pressure on prices, thus listing two risks to the downside three to the upside. Until June, these risks had been equally balanced. 

This shift leaves room for interpretation, as the Monetary Policy Committee (Copom) didn't explicitly say that the balance of risks is asymmetric. Also, they didn't clarify whether it might weigh certain risks more heavily, which could maintain a symmetric view. (See MNI: BCB Rate Hike Unlikely But Not Off The Table-Ex-Officials)

"Among the upside risks for the inflationary scenario and inflation expectations, it should be emphasized (i) a more prolonged period of unanchoring of inflation expectations; (ii) a stronger-than-expected resilience of services inflation due to a tighter output gap; and (iii) a conjunction of internal and external economic policies with an inflationary impact, for example, through a persistently more depreciated currency," the statement said. 

On the downside, Copom highlighted the possible risks of a greater-than-projected deceleration of global economic activity and a more severe drag on global inflation from monetary policy tightening. 

"The Committee judges that the domestic and international environments require even greater caution on the conduct of monetary policy. In particular, the inflationary impacts of the movements of market variables and inflation expectations, if persistent, corroborate the need for more vigilance," the central bank said.

Historically, risks tending to the upside eventually require some monetary policy response. The minutes from the last two meetings showed a debate over whether the balance of risks should be considered asymmetric — a topic likely to reemerge in the next minutes, set to be released Tuesday.

The statement used the words "vigilant" and "vigilance," usually deployed when the likelihood of a rate hike is greater than a cut, in two paragraphs, compared to just one in June's decision.

Q1 2026 INFLATION

For the first time, Copom released its inflation forecast for the first quarter of 2026 as a standard reference. The projection stands at 3.4% in the baseline scenario, using the BCB market Focus survey's Selic path (10.50% for 2024 and 9.5% for 2025), and 3.2% in an alternative scenario with the interest rate remaining constant at the current level, both above the 3% target.

"The communication of the six-quarter-ahead projection, corresponding to the first quarter of 2026, the current relevant horizon of monetary policy, is in line with the new inflation-targeting system established by the Decree 12,079/2024, to take effect on 1/1/2025," the statement said.

This change reflects the board's focus on inflation over the relevant horizon for monetary policy, considering that rate adjustments typically take time to fully impact inflation.

For 2024, Copom's projection is 4.2%, and for 2025, 3.6%, up from 4.0% and 3.4%, respectively, assuming rates remain at 10.50% this year and 9.5% next year, according to the Focus survey. With the Selic rate held constant until the first quarter of 2026, the forecast is 4.2% for 2024 and 3.4% for 2025.