MNI INTERVIEW: BCB Close To Ending Its Hiking Cycle - Volpon
MNI (BRASILIA) - Central Bank of Brazil minutes released last week contain signs the board is close to the end of its hiking cycle, former deputy governor for international affairs Tony Volpon told MNI, adding that the BCB is likely to deliver one more 100-basis-point rate increase at its next meeting as guided and then stop or slow its tightening pace.
The minutes point to a discussion over a possible economic slowdown, he noted.
"If you really wanted to send a deliberately hawkish message, you wouldn’t have brought this up," Volpon, now a professor at Georgetown University and a partner at CF Inovacao, said in an interview.
"When the central point is meant to be hawkish, the message is very simple. But when too many details and qualifications are added — 'it’s this, but it could be that' — it shows a bit of a lack of conviction.”
Last month, the Monetary Policy Committee (Copom) hiked its Selic rate by 100 basis points to 13.25% and indicated one more increase in March.
"If they intend to bring inflation to the center of the target, interest rates would truly have to rise above 15%. And there would need to be a strong acceleration in activity to offset the fact that expectations are highly unanchored and fiscal policy is very expansionary,” Volpon said.
HIKING CLOSE TO END
"I think they may implement one more smaller adjustment in May and then stop, the interest rate shouldn't go much beyond 14.25%."
The former official noted that the BCB may aim to stay within the inflation target range rather than hitting the 3% midpoint exactly. The tolerance band allows for a deviation of 1.5 percentage points in either direction.
"When the central bank wants to be hawkish, its communication is usually simple and one-directional. You either say that inflation is off track or that you will bring it back on track, whatever the cost. The discussion doesn’t get caught up in balancing one thing against another, weighing trade-offs, or considering different factors. When the central bank starts doing that, you know they won’t fully deliver on the target," he stressed.
Volpon said the real's appreciation has eased some pressure on the BCB, but the board may soon face new inflationary shocks, such as the potential reinstatement of import tariffs threatened by U.S. President Donald Trump on Mexico and Canada. These tariffs are currently on hold until March, but if reimposed, they could strengthen the dollar once again. (See MNI BCB WATCH: Copom's 100BP Guidance Trimmed To One Meeting)