MNI BCB WATCH: Copom To Hold Rates At 10.50%, Focus On Tone

MNI (BRASILIA) - Brazil’s Central Bank looks set to hold its official Selic rate Wednesday at 10.50% for a second consecutive meeting, as concerns about rising inflation expectations and severe foreign exchange rate volatility have not only stalled a year-long easing cycle but even reintroduced the possibility of fresh rate hikes into the outlook.  

Investors will be looking to the policy statement for clues on the next decisions and the degree of internal agreement on the outlook, with a hawkish tone seen as likely given the worsening economic scenario.

Since the last meeting, inflation expectations have risen to 4.10% for 2024, up from 3.96% on June 17, according to the BCB Focus market survey released Monday. For 2025, the forecast increased to 3.96% from 3.80% between the two decisions.

The real has also faced recent volatility, hitting a low of 5.68 to the dollar on July 2, down from around 5.00 at the beginning of the year. This occurred after President Luiz Inacio Lula da Silva criticized the central bank for keeping rates high and cast doubt on his government's ability to achieve a zero fiscal deficit target for 2024 and 2025. 

Spending cuts announced by Finance Minister Fernando Haddad have since brought some stability, with the currency trading at 5.62 Monday, still above a level of 5.45 at the time of the last Copom meeting.

That unanimous decision to keep rates unchanged in June contrasted with a split vote in May, when four members called for a 50-basis-point reduction against the 25-basis-point cut that was delivered. 

HIKING NOT OFF THE TABLE

Tony Volpon, former BCB deputy governor for international affairs, told MNI that the possibility of raising rates this year cannot be ruled out, especially if Copom's forecasts for inflation deviate significantly from the 3% target. (See MNI: BCB Rate Hike Unlikely But Not Off The Table-Ex-Officials)

Copom's latest forecasts for inflation were 4.0% this year and 3.4% next year, based on the Selic rate path extracted from the Focus market survey, which projected it at 10.50% at the end of 2024 and 9.50% in 2025.

However, the statement included an alternative scenario, with the Selic rate stable at 10.50% until the end of next year, leading to an inflation rate of 3.1% in 2025, closer to the 3% target.

On the other hand, former BCB deputy for monetary policy Luiz Fernando Figueiredo told MNI he believes that raising rates is "very far" from the main scenario.

Former deputy governor for monetary policy Reinaldo Le Grazie told MNI the BCB is likely to maintain its Selic official rate at 10.50% until the end of 2025, despite currency weakness and political noise. (See MNI INTERVIEW: BCB To Keep Rates High For Longer -Le Grazie)