MNI INTERVIEW: BCB To Up Pace In Short Hiking Cycle - Kanczuk

MNI (BRASILIA) - The Central Bank of Brazil is set to accelerate the pace of its hiking cycle to 50-basis-point increments at upcoming meetings, but political pressures are likely to stop it from hiking enough to control inflation next year, former BCB Deputy Governor for Economic Policy Fabio Kanczuk told MNI.

"The path is open for them to accelerate the pace, moving toward a much higher interest rate. My best guess is that the next hikes will be 50bp with an upward bias," said Kanczuk, now head of macroeconomics at ASA Financial Institution.

Copom’s tone after its last meeting suggested bigger hikes were on the way, he said. In September, the BCB raised its Selic rate by 25bp to 10.75%, in its first hike since August 2022 after holding borrowing costs steady for two consecutive meetings following nearly a year of aggressive easing.

"The words they used and the projections from the model they presented are consistent with an interest rate cycle of around 300 basis points, as if rates needed to reach 13.5%," Kanczuk said. (See MNI INTERVIEW: BCB To Step Up Hiking Pace In Nov.-Figueiredo)

In his view Copom will raise only rates to around 12.5%, which is very close to market consensus, but he differs in that he expects them to then be obliged to hold for some time.

"The dynamics of my call are different. The consensus says the central bank doesn’t need to raise rates beyond 12.5% because economic activity will slow, and inflation will fall. People are saying that what's driving things now is a fiscal boost, but that boost will disappear and become more contractionary," he said.

"My view is different. Rates will reach 12.5%, and it won’t be enough. Inflation will remain a problem, and economic activity will stay strong because, for me, the fiscal issue is permanent, and now there's also the parafiscal matter, which is becoming increasingly important," he added, referring to government-subsidized credit.

POLITICAL PRESSURE

“After that, I don’t think they will be able to cut rates, which is another difference from the consensus, which says inflation will fall, and the BCB will cut rates. In my view, they won’t cut rates next year, and inflation will rise.”

The Central Bank’s hiking cycle will be interrupted due to political pressure, Kanczuk said, after Governor Roberto Campos Neto’s term concludes at the end of the year and he is replaced by Deputy Governor for Monetary Policy Gabriel Galipolo. While Campos Neto was appointed under former President Jair Bolsonaro, his successor was named to Copom by the government of President Luiz Inacio Lula da Silva.

"The current situation is politically comfortable. President Lula is accepting the rate hikes, and they can still blame Governor Roberto Campos Neto," Kanczuk said.

"I believe the government won’t accept it next year, and there will be strong political pressure to stop raising rates."

While Copom has reason to want to hike quickly, the former deputy believes that it started to hike gradually in order to see how the exchange rate would react given that the Federal Reserve was just beginning its easing cycle.

"I think this is why they started with 25bp,” he said, noting that in the event the real only appreciated modestly.

"There seem to be other factors hindering the appreciation of the exchange rate—it could be fiscal," he added.