MNI BCB WATCH: Copom Set To Hike 100BP As Signaled
MNI (BRASILIA) - The Central Bank of Brazil is expected to hike its official Selic rate by 100 basis points to 13.25% on Wednesday, as signaled the forward guidance accompanying its last decision and marking the fourth consecutive increase.
Investors will look to the policy statement for clues on the terminal rate and to see whether the Monetary Policy Committee (Copom) will maintain the 100 basis-point guidance for the next two meetings or indicate a hike of the same magnitude for only the subsequent meeting in March.
The hiking cycle follows a negative market reaction to the fiscal outlook, which has severely impacted the exchange rate and inflation expectations.
According to the BCB Focus market survey, inflation is expected to end the year at 5.50%, exceeding the upper limit of the 3% target tolerance range, which allows for a maximum of 4.5%. Expectations remain unanchored for longer horizons, with forecasts at 3.90% for 2027 and 3.73% for 2028.
Current inflation is also on a worse trajectory. The IPCA index climbed 4.83%, leaving inflation above the target range, which has a tolerance band of 1.5 percentage points in either direction.
FX EFFECT
The real has weakened to above BRL 6 per dollar from BRL 5.81 since Finance Minister Fernando Haddad announced in late November a package that includes BRL 70 billion in spending cuts over the next two years, alongside an increase in the tax threshold for lower earners, which he said would be offset by higher rates for wealthier individuals.
Recently, the currency experienced some relief as investors viewed U.S. President Donald Trump's inaugural speech as more moderate on import tariffs, which weakened the dollar. Since Trump's inauguration, the real has strengthened to around BRL 5.90.
The BCB raised rates by 100 basis points last month to 12.25% and signaled two more hikes of the same magnitude at its next two meetings.
Former deputy governor for monetary policy Reinaldo Le Grazie told MNI in an interview that the BCB is likely to deliver the 100 basis-point hikes outlined in its forward guidance at each of its next two meetings. However, he noted that the terminal rate will largely depend on the government's fiscal policy. (See MNI INTERVIEW: BCB Likely To Stick To 100BP Guidance-Le Grazie)
In his baseline scenario, Le Grazie expects the Selic rate to peak at 15%, or potentially lower, due to a slowdown in economic activity.
Former economic advisor to the Ministry of Planning and Budget Eduardo Velho agrees with the forward guidance commitment. He also believes the recent appreciation of the BRL is temporary and will not be sufficient to curb inflation unless the government implements fiscal measures to improve the public debt outlook. (See MNI INTERVIEW: Brazilian Real Improvement Is Temporary - Velho)