MNI BCB WATCH: Copom Signals End of Easing Cycle, Not Pause

The Central Bank of Brazil's (BCB) unanimous decision to maintain its official Selic rate at 10.50% on Wednesday — in contrast to a deeply split vote in May — sends a clear hawkish message about the end of the easing cycle, not just a pause.

The statement said that all board members decided to "interrupt" the cuts, "highlighting that the uncertain global scenario and the domestic scenario, marked by resilient economic activity, an increase in its own inflation projections, and unanchored expectations, require greater caution." (See MNI POLICY: BCB Pause In Sight, But Copom Consensus In Doubt)

The unanimous vote came in contrast to May's deeply split decision, emphasizing a broad shift in the committee's view.

Copom's forecasts for inflation increased to 4.0% this year and 3.4% next year, considering the Selic rate path extracted from the Focus market survey, which currently sees 10.50% at the end of 2024 and 9.50% in 2025.

The hawkish tone is evident in an alternative scenario presented by the BCB, with the Selic rate stable at 10.50% until the end of next year, leading to an inflation of 3.1% in 2025, close to the 3% target.

Last month, the BCB reduced its official Selic rate by 25 basis points to 10.50% in a decision that saw four deputies, all appointees of President Luiz Inácio Lula da Silva, dissent in favor of the 50-point cut indicated by the prior meeting's guidance.

UNANIMOUS DECISION

The decision's unanimity was especially notable since some market participants believed divisions would remain until the end of BCB Governor Roberto Campos Neto's term in December, especially since President Lula raised public critiques of the BCB chief and called for lower rates.

The former BCB Deputy Governor for Economic Policy, Fabio Kanczuk, told MNI that split votes are likely to persist until the end of the year, with the Selic remaining at 10.5% until an influx of political appointees changes the balance of power on the board. (See MNI INTERVIEW: Copom To Hold At 10.50%-Ex-BCB's Kanczuk)

The new governor, still to be appointed by the government, takes office in January 2025, with the current deputy for monetary policy, Gabriel Galipolo, being the favored candidate.