MNI BCB WATCH: Hawkish Copom Tone Hints At More 50BP Hikes

MNI (BRASILIA) - The Central Bank of Brazil's decision to accelerate the pace of rate hikes Wednesday was accompanied by a hawkish message that suggests further increases of at least 50 basis points over its next few meetings -- perhaps even bigger moves if the inflation picture deteriorates further.

In raising the official Selic rate by a half point to 11.25%, the Monetary Policy Committee’s (Copom) also projected an inflation rate of 3.6% over its stated policy horizon, now set for the second quarter of 2026. This is above the 3% target and higher than the previous projection of 3.5% for the first quarter of 2026 -- which was the goal period for the September meeting.

"Regarding the domestic scenario, the set of indicators on economic activity and labor market continues to exhibit strength. Headline inflation and measures of underlying inflation are above the inflation target in recent releases," the statement said. (See MNI WATCH: Copom Set To Accelerate Hiking Pace To 50BPS) Policymakers left the pace of future adjustments open and dependent on data. 

The revised estimate indicates the inflation outlook has worsened because it not only rose by 0.1 percentage-point, but also occurred even after the "relevant horizon" window over which the central bank believes that monetary policy has its maximum effect on the economy -- currently six quarters ahead -- moved forward.

FISCAL WARNINGS

Additionally, Copom heightened its warnings about fiscal problems and their impact on asset prices. "The Committee has been monitoring closely how the recent developments on the fiscal side impact monetary policy and financial assets. The perception of agents about the fiscal scenario has significantly impacted asset prices and expectations, especially the risk premium and the exchange rate," the statement said.

"The Committee stresses that a credible fiscal policy committed to debt sustainability, with the presentation and execution of structural measures for the fiscal budget, will contribute to the anchoring of inflation expectations and to the reduction in the risk premia of financial assets, therefore impacting monetary policy," it added, referencing the spending cut measures the government is expected to announce.(See MNI INTERVIEW: More Brazil Budget Freezes If Needed -Guimaraes)

Turning to the global context, the BCB noted that the environment remains "challenging," highlighting the uncertain economic outlook in the United States, "which poses questions about the pace of economic deceleration, disinflation and, consequently, about the Fed's monetary policy stance."

"The central banks of major economies remain committed to bringing inflation back to its targets in a context characterized by labor market pressures. The Committee judges that the external environment, also marked by less synchrony in monetary policy cycles across countries, continues to require caution from emerging market economies," Copom said.

The BCB also indicated that the pace of future interest rate adjustments and the total magnitude of the tightening cycle "will be determined by the firm commitment of reaching the inflation target and will depend on the inflation dynamics, especially the components that are more sensitive to monetary policy," such as its own inflation projections, market expectations, the output gap, and the balance of risks, which currently leans toward the potential for upside surprises.