MNI BCB WATCH: Lack Of Statement Guidance Shows Copom Divided

Brazil's Central Bank lowered interest rates by just a quarter point Wednesday, slowing the pace of monetary easing after a string of 50 basis point reductions that began in August 2023 in a vote that proved too divided for policymakers to offer markets any guidance into future policy.

Four deputies, all appointed by President Luís Inácio Lula da Silva, voted in favor of the 50 bp cut, the most split vote since the start of the cycle. The division confuses the outlook for policy because it suggests a significant portion of Copom wants to continue loosening monetary conditions, but some investors could view the lack of guidance as a sign the BCB might be getting closer to the end of rate cuts.

The board decided to abandon the guidance and slow the pace of easing due to increasing global stress and the government’s revision to its 2025 fiscal target, despite better recent inflation data and a more benign foreign exchange environment. (See MNI INTERVIEW: BCB Still Likely To Cut By 50 In May-Figueiredo)

Domestically, Copom said economic activity and the labor market have exhibited more strength than expected. "Headline consumer inflation remains on a path of disinflation, while various measures of underlying inflation are above the inflation target in recent releases," said the statement.

"The global environment has become more adverse because of heightened and persistent uncertainty about the beginning of the easing cycle in the United States and the speed of sustained disinflation in many countries," Copom added.

Regarding fiscal risks, Copom stated that it is closely following "recent developments" and their impact on monetary policy.

DIVIDED COMMITTEE

Deputy governors Gabriel Galípolo — the most likely name to assume the BCB presidency next year — Paulo Picchetti, Ailton de Aquino, and Rodrigo Alves Teixeira, all appointees of President Lula, voted for a 50 basis point cut. The other members, all chosen by previous governments, voted for a 25 basis point reduction.

Last year, at the beginning of his mandate, Lula was vocal against the BCB's high rate policy, calling for Selic cuts.

Markets largely anticipated the shift toward a smaller reduction despite March guidance for another half point cut after BCB governor Roberto Campos Neto said last month the board was "not afraid to do what's needed" if economic trends change. (See MNI INTERVIEW: Brazil Could Hike Rates In 2025 - Ex-BCB Serra)

At the time, it was not quite clear whether he was speaking for himself or the committee, raising expectations for dissenting votes that were in fact realized.

Since then, the BCB Focus survey has gradually revised upward its terminal rate forecasts. The document released Monday points to 9.63% at the end of 2024, up from 9.0% four weeks ago, and 9.00% for 2025, from 8.5%. For 2026, the market expects an increase to 8.75%, up from 8.50% in last month's survey.