MNI BCB WATCH: Guidance Shift Makes Rate Path Less Certain

Brazil's central bank tweaked its forward guidance on monetary policy Wednesday for the first time since August last year, when the easing cycle started, a hawkish shift that suggests policymakers are seeking greater flexibility as they become less certain about the future path of interest rates.

After cutting the Selic rate by 50bps to 10.75%, Copom members now say they expect an additional cut of the same size at the "next meeting," a shift from prior characterizations of forthcoming half point moves at the "next meetings." In addition, further easing is predicated on whether "the scenario evolves as expected".

It's not yet clear if the BCB intends to signal that the end of the cutting cycle is in sight or whether the monetary authority would decelerate the pace by 25bp from June. The new guidance could also have implications for where rates will end the year -- and the cutting cycle more broadly.

BCB Deputy Governor for Monetary Policy Gabriel Galipolo recently said Copom would eventually remove the plural from the guidance, but that it would gain nothing by signaling how far it is likely to cut rates, and that data dependency took priority.

The governor, Roberto Campos Neto, and Diogo Guillen, deputy for economic policy, have offered a similar view, highlighting that the same path could be achieved with or without the explicit guidance. Still, dropping the plural reference clearly buys policymakers freedom to decide next moves at each meeting.

Copom’s forecasts showed inflation still remaining above its 3% target at 3.5% for 2024 and 3.2% in 2025, unchanged from the January statement. These were based on 9.0% Selic rate for year-end 2024 from the BCB’s Focus market survey, also unchanged. This reinforces the BCB message that "the baseline scenario has not changed substantially".

MORE FLEXIBILITY

"Due to heightened uncertainty and the need for more flexibility in the conduct of monetary policy, the Committee members unanimously decided to communicate that, if the scenario evolves as expected, they anticipate a reduction of the same magnitude in the next meeting," the central bank said in its post-meeting statement. "The total magnitude of the easing cycle throughout time will depend on the inflation dynamics" and the terminal rate has to remain restrictive.

IPCA inflation was 4.50% in February in year-on-year terms, just down from 4.51% in January, and so by a sliver the fifth consecutive monthly deceleration in the annual series. Monthly inflation was 0.83% in February, slightly higher than the 0.79% consensus forecast.

February’s data gave ammunition to those on the central bank’s monetary policy committee arguing that wage rises are not feeding inflationary pressures. These members note the biggest components driving services inflation are sectors such as education, which typically see seasonal increases at the beginning of the year for reasons unrelated to the labor market. (See MNI POLICY: Inflation Data To Ease Brazil Cenbank Wage Nerves)

The statement did not offer any insights into Copom's views about the relationship between employment and service inflation, but the minutes, to be released next week, are likely to shed more light on the internal debate.