MNI INTERVIEW: BCB Still Likely To Cut By 50 In May-Figueiredo

Increasing stress in global markets and the government’s revision to its 2025 fiscal target forced Central Bank of Brazil Governor Roberto Campos Neto to play down guidance for a 50-basis-point cut in May, but it is likely that next month’s reduction will still go ahead though unaccompanied by clear signaling toward further easing, former BCB deputy for monetary policy Luiz Fernando Figueiredo told MNI.

“The board could even say that it will continue the easing process, but without a clear indication of the pace for next meetings. It's important to keep in mind that we still have very high interest rates," Figueiredo, now board president at Jive Investments, told MNI in an interview.

The BCB is likely to slow the pace of cuts to 25bp at its June meeting, he added.

"My forecast for the terminal rate was between 8.5% and 9% before the scenario worsened. Now, I think it's more like 9.5%," he said. "If the terminal interest rate is 10%, as some are expecting, with the inflation projected by the market of 3.5%, we're talking about a real interest rate of 6.5%. It's absurd because the neutral rate is 4.5%. Some think it's 5%, in which case we would still be 1.5 percentage points above neutral.”

FISCAL CREDIBILITY

Following a 50bp cut in the Selic rate to 10.75% last month, the BCB’s Monetary Policy Committee (Copom) indicated it expected an additional cut of the same size at the next meeting in May. But last week Campos Neto said at a public event that the board is "not afraid to do what's needed" if economic trends change, adding that its forward guidance is data-dependent. (See MNI INTERVIEW: Lower Inflation Could Hasten Copom Cuts-Werlang).

"Roberto Campos Neto himself clearly stated that it is possible to provide guidance only when there is a lot of confidence in the scenario. When there is no confidence, it's not possible, it would be unproductive to indicate something and then have to change it later," Figueiredo said.

The Brazilian government damaged its credibility by revising its 2025 fiscal goal to a balanced budget from an earlier surplus of 0.5% of GDP, he added.

"Revenue has improved, and the government wants to spend more. This greatly reduces people's expectations about the commitment to reach the target,” he said, noting that Copom had pointed to the importance for anchoring inflation expectations of meeting already-established fiscal targets in recent statements.

EXCHANGE RATE

The recent weakness of the real is unlikely to affect the BCB’s calculations, Figueiredo said. (See MNI POLICY: Brazil Central Bank Saw No FX Dysfunction Tuesday)

"I don't think an exchange rate of 5.10 or 5.20 affects the central bank's actions much. Of course, above 5.30, it could indeed change things, but today the pass-through to inflation is very low, around 5%. So, I don't think it's that relevant.”

The real is likely to strengthen again, according to Figueiredo.

"Brazil's trade balance has a high surplus. Brazil is running a trade balance that brings in USD90-USD100 billion, it's a great asset for the country," he said.