MNI INTERVIEW: BCB Likely To Stick To 100BP Guidance-Le Grazie
MNI (BRASILIA) - The Central Bank of Brazil is likely to deliver the 100 basis-point hikes outlined in its forward guidance at each of its next two meetings, former deputy governor for monetary policy Reinaldo Le Grazie told MNI, though he added that the terminal rate will largely depend on government fiscal policy.
"I see no reason to accelerate the pace now. The government is still not taking action and hasn’t provided [fiscal] signals to justify a slower pace either," Le Grazie, who left the BCB in 2019 and is now a partner at fund manager Panamby Capital, said in an interview.
The BCB raised rates by 100 basis points last month to 12.25% and signaled two more increases of the same magnitude at the next two meetings. "The central bank has to deliver two 100-basis-point hikes, I don’t see much of an alternative. After that, it will depend on the circumstances. External factors, of course, are relevant, but government actions will be decisive," Le Grazie said.
In his baseline scenario, he expects the Selic rate to peak at 15% or potentially lower due to a slowdown in economic activity. (See MNI INTERVIEW: Brazil Experiencing Confidence Crisis - Pires)
"Considering the expected slowdown in Brazil's economic activity, I don't think interest rates will rise much beyond the planned 14.25%. They could go up to 15%, but no higher than that, and perhaps even less," the former official explained.
FISCAL MEASURES TO IMPROVE
He believes it is possible for the government to adopt new measures to improve the economic outlook.
"I think a very plausible scenario is that the government will get better organized during the first quarter,” he said, "If they manage that and inflation remains persistent, there’s no reason for the central bank to change course, either up or down. What might happen is that in the second quarter, the central bank won’t deliver the 75-basis-point hike currently expected by the market. They might opt for just 50 basis points, for example."
Even more likely, the market will start recognizing that economic activity is already signaling that rates pricing is too high.
“It will begin pricing in lower future rates," Le Grazie said.
BETTER SCENARIO
In a better-case scenario, the government would adopt new fiscal measures and improve its relationship with Congress.
"In a good outlook, we could see expectations improving significantly, the real appreciating, and then we might even bring forward the start of interest rate cuts."
However, the worst-case scenario would be for the government to react to a slowdown in economic activity by increasing expenditure.
"As we approach the election year, they’ll see activity declining and might try to compensate with fiscal incentives,” Le Grazie said.
He noted expectations that U.S. monetary policy could become more restrictive than anticipated, which would pose an additional challenge for Brazil by keeping the real weak and the dollar strong.