MNI INTERVIEW: BCB Likely To Keep Cuts Guidance -Schwartsman

The Central Bank of Brazil is likely to maintain its forward guidance for further 50-basis-point cuts at its next meeting in March, meaning that cuts of that magnitude are almost guaranteed in March, May and June, its former director of international affairs Alexandre Schwartsman told MNI.
"Accelerating the pace [of cuts]}was a relevant discussion at the end of 2023; now that discussion no longer exists. At some point, the central bank will have to consider a reduction in the pace,” Schwartsman said in an interview. “When it alters [its guidance] it will no longer be a discussion about accelerating, it won’t be about stopping, but it will be about a reduction in the pace to 25bp.” (See MNI INTERVIEW: No Acceleration Of Brazil Rate Cuts - Le Grazie)

The Monetary Policy Committee (Copom) is likely to stop cutting the official Selic rate once it approaches 9.00%. In January, Copom reduced the Selic by 50 basis points to 11.25%, and said it anticipates “further reductions of the same magnitude in the next meetings.” The rate had hit a tightening cycle peak of 13.75%.

"I think the central bank probably won't change the forward guidance [at its March 19-20 meeting]. It doesn't mean that this discussion won't happen. In May or June, they will have to reassess," added Schwartsman, who now runs an economic consultancy.

"It is still maintaining a very restrictive monetary policy,” he said, noting that the BCB’s estimate of the real neutral rate of interest is 4.5%. Brazil’s inflation was 4.5% in January.

UNANCHORED EXPECTATIONS

The BCB's Deputy Governor for Monetary Policy Gabriel Galipolo has said that analysts are likely to start to revise down 2025 inflation projections by around the middle of this year, but Schwartsman thought upward revisions were more probable.

“We are heading towards inflation of 3.8% this year, lower but decreasing at a slow pace," he said.

According to the BCB’s Focus market survey, investors expect inflation of 3.5% in both 2026 and 2027, above the mid-point of the central bank’s target of 3% plus or minus 1.5 percentage point set for it by the National Monetary Council. For 2025, forecasts have increased to 3.52% in the last two weeks. (See MNI: Inflation Expectations Seen Key To Pace Of Brazil Easing) Schwartsman pointed to unease ahead of the conclusion of Governor Roberto Campos Neto’s term at the end of this year.

"This unanchoring for longer terms is indeed reflecting a loss of credibility for the Central Bank due to the likely change in leadership. We are heading towards inflation of 3.8% this year, lower but decreasing at a slow pace. In the middle of the year, when people start doing the calculations [for 2025], perhaps the projection [of 3.5%] won't decrease, maybe it will rise,” he said.

The former official pointed to how President Luiz Inacio Lula da Silva had demanded that Campos Neto lower interest rates at the beginning of his government.

"Due to everything that happened at the beginning of 2023, the attacks that Roberto received, there is a suspicion that it may lead to a more lenient central bank with the change of leadership. The BCB itself has not given clues in this regard," Schwartsman said.

LABOR MARKET

Labor market overheating indicates that the Brazilian economy is growing above its potential, he added.

"The thermometer for this is what happens with wages. In the case of services, the cost increase is passed on more quickly than with goods. There is now a certain acceleration of services and wages, which is worrying some BCB vice-governors,” he said, though he added. “Nothing is definitive; it's necessary to observe and see what happens.”

Government fiscal situation also remains expansionary, will feed demand this year, he said.