MNI INTERVIEW: Brazil Could Hike Rates In 2025 - Ex-BCB Serra
Ex-BCB deputy for monetary policy says a new governor, who will take office next year, will face testing from the market.
Brazil's Central Bank is likely to end the current easing cycle around 10% and will probably debate raising rates again in 2025, just as financial markets are testing out a new governor set to take office next year, former BCB deputy for monetary policy Bruno Serra Fernandes told MNI.
"With the easing cycle ending near 10% and probably in 2025, we will have an upward cycle. In the first and second quarters, I think we will discuss interest rate hikes," he said in an interview at his office in Sao Paulo.
Historically, central bank governor transitions have been turbulent in Brazil, said Serra, now portfolio manager of the "Janeiro" fund family at Itaú Asset. The current president of the BCB, Roberto Campos Neto, will conclude his term at the end of 2024, with the successor, yet to be appointed by the government, assuming office in early 2025.
"Transitional moments at the central bank are very delicate, and that's happening now. Normally, inflation expectations, even for longer terms, react strongly to current inflation. So, if current inflation is good and falling, long-term expectations will be converging towards the target. The fact is that this is not happening now," said Serra.
"The government has been pushing for a reduction in interest rates, not a reduction in inflation and lower interest rates as a result. The difference is subtle. For politicians, this often doesn't make much difference. The intention, the desire to lower interest rates, is very good. But for market participants, there's a big difference between perceiving a demand to lower interest rates and a demand to reduce inflation and create means to lower interest rates. This generates confusion," he said. (See MNI INTERVIEW: BCB Still Likely To Cut By 50 In May-Figueiredo)
Against that backdrop, the former official believes that inflation expectations for 2025 and 2026 will rise until the end of the year, forcing the central bank to interrupt the interest rate cycle slightly earlier than expected, close to 10%, and putting the possibility of a rate rise next year on the table. Currently, the Focus market survey points to 9.50% by the end of this year and 9.00% by the end of 2025.
"The more hawkish the new BCB governor's tone, the less pressure he will face to raise interest rates to demonstrate his credentials to the market in combating inflation. The less hawkish he is, the tougher his job will be from 2025 onwards," he said.
SLOWING PACE OF CUTS
Following a 50bp cut in the Selic rate to 10.75% in March, the BCB’s Monetary Policy Committee (Copom) indicated it expected an additional cut of the same size at the next meeting in May. But two weeks ago 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 now data-dependent after increasing global stress and domestic fiscal risks.
At the time, the BCB governor detailed four possible scenarios for the next meeting, on May 8th, and part of the market interpreted that this would mean reducing the pace already in this decision. "Everything fits within these four scenarios, they could still cut 50bp, but I think that a 25bp pace is more likely," said Serra. (See MNI INTERVIEW: Lower Inflation Could Hasten Copom Cuts-Werlang)
"The short-term inflation has been very good. The last two pieces of data were very good. So the question is whether expectations will react more to short-term inflation or to the Central Bank's transition and the worsening external situation," added.
REAL APPRECIATION
Serra said conditions are favorable for a greater appreciation of the BRL, which has performed well despite recent FX volatility across the region.
As the central bank considers rate hikes in the first half of 2025, he said, "this, along with other factors, such as a robust external account, will support the exchange rate."
"The historical average price of the exchange rate, in real terms, is closer to 4BRL. I think the trend is for it to slip below 4.5BRL," he said.