MNI BCB WATCH: More Copom Hikes To Come, Pace Data-Dependent

MNI (BRASILIA) - The Central Bank of Brazil is committed to raising interest rates further after Wednesday's quarter point hike in the Selic rate to 10.75%, although policymakers left the pace of future adjustments open and data-dependent.

"The pace of future adjustments of the interest rate and the total magnitude of the cycle that just started will be determined by the firm commitment of reaching the inflation target and will depend on the inflation dynamics," the Copom said in its post-meeting statement. 

The use of the word "cycle" specifically indicates this week's increase was not a one-off. 

The board stated it is closely monitoring components more sensitive to monetary policy and economic activity, such as inflation expectations, its own projections, the output gap, and the balance of risks.

At the last meeting in July, when the Monetary Policy Committee (Copom) held rates at 10.50%, the balance of risks asymmetry was not a consensus among members. Now, the BCB emphasized that the board considers it tilted to the upside, citing a more prolonged period of unanchored inflation expectations, stronger-than-expected resilience in services inflation, and a persistently depreciated currency.

On the downside, Copom noted the risks of a greater-than-expected slowdown in global economic activity and a larger-than-anticipated drag from global monetary tightening.

INTENSE ACTION AHEAD

Since Copom indicates inflation risks remain skewed to the upside despite the hike, this suggests more intense action ahead, as the board would have already incorporated some worsening into the central scenario and is now acting to correct the deviation of projected inflation from the target, former BCB deputy governor for economic policy Mario Mesquita told MNI in an interview Tuesday. (See MNI INTERVIEW: Mesquita Sees 25BP BCB Hike, 50 Not Ruled Out)

The BCB also revised up its estimate for the output gap, now considering it positive. In the last meeting, the board had projected a negative output gap, but strong activity data and a vigorous labor market have pointed to an economy running faster than potential.

"Regarding the domestic scenario, the set of indicators on economic activity and the labor market has been exhibiting more strength than expected by Copom," the statement said.

Former deputy governor for international affairs Tony Volpon told MNI in an interview Monday that recent data shows the economy is indeed operating above its potential, which should settle the board's discussion and justify the rate hike. (See MNI INTERVIEW: BCB 'Dovish Hike' Could Backfire - Volpon)

Copom raised its inflation forecast for the first quarter of 2026, which has become the standard reference due to a new inflation-targeting system. The projection increased to 3.5% in the baseline scenario from 3.4%, still above the 3% target using the BCB market Focus survey’s Selic path (11.25% for 2024 and 10.50% for 2025).

On the external front, BCB noted the "environment remains challenging" due to the inflection point in the U.S. economic cycle, which raises questions about the pace of economic deceleration, disinflation, and its monetary policy stance of adopting a hawkish tone even after the 50-basis-point cut by the Federal Reserve.