MNI INTERVIEW: Brazil's Copom On Hold Until December - Kfoury

The Central Bank of Brazil is likely to keep interest rates on hold at 10.50% at least until the end of this year, barring a surprise fall in inflation, the former head of the BCB’s department of economic research Marcelo Kfoury told MNI.

"To resume cutting interest rates this year depends heavily on current inflation,” said Kfoury, noting that inflation data, which saw the annual rate rise in May to a higher-than-expected 3.93%, breaking a string of seven consecutive falls, had “seen better days.”

The weakening real, which has depreciated by nearly 8% against the dollar since May 6, may also increase inflationary pressures from gasoline and imports as it passes 5.40 to the greenback, said Kfoury, who participated at Copom meetings as a non-voting member until 2006 and is now a professor of the finance department at Fundacao Getulio Vargas.

A cut will only come if inflation comes in below expectations, reducing projections for the year at least slightly, he said in an interview.

“But I think it’s difficult,” he said. (See MNI INTERVIEW: Hawkish Copom Hints At Prolonged Hold-Kawall)

The BCB held its official Selic rate at 10.50% Wednesday, keeping borrowing costs unchanged for the first time after nearly a year of aggressive easing. Copom’s unanimous decision contrasted with the split vote for a 25-basis-point cut in May, when four dissenters called for a 50bp reduction.

FISCAL CONCERN

The statement accompanying the decision pointed to delays to the Fed’s easing cycle and a hotter-than-expected Brazilian economy, with rises in the BCB’s own inflation projections and an unanchoring of surveyed inflation expectations. But Kfoury noted that an alternative scenario presented by Copom showed inflation nearly at target with constant interest rates until the end of 2025.

"This shows that there would be no need to raise interest rates,” he said, adding that these remain at very restrictive levels, with a real rate of 7%, Kfoury said.

"This is above any measure of the neutral interest rate, even for those who think it has increased a little."

The Central Bank estimates that the current neutral real interest rate is 4.5%.

While doubts over government fiscal policy are the biggest force fueling inflation expectations, increased uncertainty over the BCB’s policy direction once Governor Roberto Campos Neto’s term expires at the end of the year is also a factor, said Kfoury. The new governor, still to be named by the government, will take office in January 2025, with the current deputy for monetary policy, Gabriel Galipolo, regarded as the favourite.