MNI BCB WATCH: Copom To Hold Rates, With Risk Of Another Split

Brazil’s Central Bank is expected to hold its official Selic rate at 10.5% on Wednesday, for the first pause in cuts after nearly a year of aggressive easing, though there is a risk doves on monetary policy committee could argue for a further reduction, potentially repeating a split in Copom which appeared in May.

More hawkish Copom members, including Governor Roberto Campos Neto, are likely to favor a pause as the BCB becomes increasingly data-dependent and eschews clear forward guidance, and they likely have the numbers to resist what could be dovish calls for a 25 basis-point cut. See MNI POLICY: BCB Pause In Sight, But Copom Consensus In Doubt)

Markets saw political overtones in the split May decision to cut by a quarter point, despite early guidance for a 50bp reduction. The four dissenters were all appointees of President Luiz Inacio Lula da Silva, with former BCB deputy governor for economic policy Fabio Kanczuk telling 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)

With inflation expectations deteriorating, prominent Brazilian analysts argue there is no room for further cuts for now.

SPLIT LIKELY TO PERSIST

The most recent BCB Focus survey, released on Monday, showed that inflation forecasts rose to 3.96% for 2024, up from 3.90% one week before, to 3.80% for 2025, up from 3.78%, and to 3.60% for 2026. Copom members have emphasized that anchoring expectations is a crucial monetary policy goal.

Forecasts for the Selic rate are at 10.50% for this year, including a pause this week. IPCA inflation for May brought more bad news for Copom. In annual terms, prices rose by 3.93%, up from 3.69% in April, the first acceleration in the gauge following seven consecutive monthly declines in the 12-month accumulated series. The consensus was for 3.88%. (See MNI POLICY: Brazil's Copom Muddles Signal About Terminal Rate)