MNI INTERVIEW: Copom At Ease With Market Rate Pricing-Kfoury

Brazil's Central Bank seems "comfortable" with a market consensus that sees the official Selic rate ending the year at 9.00%, the former head of BCB Department of Economic Research Marcelo Kfoury told MNI Tuesday, after the release of January meeting minutes.

"The minutes don't give a hint of the terminal rate, but they seem to be comfortable with the path pricing in the Focus [BCB market survey]," said Kfoury, now a Professor of Finance Department at Fundação Getulio Vargas, in an interview. The Copom's inflation forecast, which considers the Selic rate projected by the Focus survey, is 3.5% for 2024 and 3.2% for 2025, both slightly above the central target of 3%.

He noted these minutes are almost identical to the December document, indicating the central bank is set to keep cutting rates in increments of 50 basis points per meeting -- with no inclination to accelerate the pace of easing. (See MNI INTERVIEW: No Acceleration Of Brazil Rate Cuts - Le Grazie)

"According to Copom, the international scenario is more benign, with more hope on the deflation side. The domestic economy is showing signs of slowing down, but they are worried about the resilience of the labor market," Kfoury said.

According to the minutes, "The committee noted that the labor market remains dynamic but maintained its assessment that the real income expansion may still reflect temporary issues. Copom deemed important to continue monitoring the several labor market variables very closely, in particular the dynamics of real income, which has had higher growth in recent months." (See MNI: Inflation Expectations Seen Key To Pace Of Brazil Easing)

The former official also pointed to a lack of discussion about fiscal policy in the minutes despite a primary deficit of BRL 230 billion in 2023, with an increase in real expenses. "No one expects the deficit to be zero this year, as the official goal demands," he said, adding that the market will monitor how Copom is going to react if the government gives up on the fiscal target.

Brazil's central bank has cut interest rates five times in 50 basis point increments starting in August 2023, after rates reached a cycle peak of 13.75%.