MNI INTERVIEW: BCB To Hold Rates For Now Despite Worse Outlook

MNI (MEXICO CITY) - The Central Bank of Brazil is likely to maintain its Selic rate at 10.50% at upcoming meetings this year, although the chances of an interest rate hike have risen as the inflation backdrop worsens, former deputy governor of International Affairs Alexandre Schwartsman told MNI.

"I don't think the Copom will raise interest rates, but I used to be more confident about that. Today, I’m more divided,” he said in an interview.

“Technically speaking, the conditions for a rate hike are present. There is a strong body of evidence. From the perspective of current inflation, we’re seeing a shift. Core inflation, which was on a downward trajectory, is now showing signs of an uptick,” noted Schwartsman, who now runs an economic consultancy.

KICK THE CAN

Despite this, Schwartsman believes the Copom's strategy will be to "kick the can down the road" by keeping rates at 10.50% to see how the economy responds. (See MNI POLICY: BCB Divided Over Risks To Inflation)

“Current inflation is worsening, and this doesn’t seem accidental since it’s reflected in core measures,” he added.

Schwartsman emphasized that the Copom's projection is close to the 3% target, and he doesn’t expect significant changes at the next meeting on September 18. "Honestly, I think the Central Bank's projection is underestimated, but in their view, there isn't a significant inflation deviation in the relevant horizon, so not much would need to be done in terms of monetary policy," he said.

DIVERGING EXPECTATIONS

Still, Schwartsman conceded that a tightening of the labor market, increased capacity utilization and sharp currency depreciation have complicated the inflation outlook. 

"Even excluding the worst moments, there’s been a 10% to 12% depreciation this year, which affects prices more sensitive to the exchange rate," he said.

"The Central Bank is projecting inflation within the relevant horizon that it considers above the target. It’s not by much, the projection is 3.2% (for Q1 2026)."

In contrast, the market's projection for the same horizon is 3.8%, he noted. "This suggests a divergence in inflation expectations, which makes a strong case for a rate hike."

In July, the Central Bank of Brazil unanimously decided to hold the Selic rate at 10.5% for a second consecutive meeting, offering no forward guidance for the next sessions. However, the minutes from the meeting indicated that the Copom would "not hesitate" to hike rates if necessary.