MNI INTERVIEW: Copom To Hold At 10.50% - Ex-BCB's Kanczuk

A split within Brazil's Central Bank is likely to persist until the end of the year, with Copom potentially holding borrowing costs at 10.5% until an influx of political appointees change the balance of power, former BCB deputy governor for economic policy Fabio Kanczuk told MNI.

Kanczuk, now head of macroeconomics at ASA Investments, saw political overtones to this month’s split, which saw the BCB reduce its official Selic rate by 25 basis points to 10.50% with four deputies dissenting in favor of the 50-point cut indicated in the prior meeting's guidance. The dissenters, all appointees of President Luis Inacio Lula da Silva, were much more dovish, Kanczuk said. (See MNI INTERVIEW: Split BCB Vote Sends Political Message-Velho)

"There are now two groups on the board, one led by Governor Roberto Campos Neto, and the group of dissidents who voted for a 50bp cut. This year, I think the first group will vote to maintain interest rates at all meetings. Next year, the government will have three more appointees on the board, and the five will become only two. Then the pressure to cut will return -- I imagine they could go down to around 8.5% or 9% in 2025," he said in an interview.

TERMINAL RATE DIVERGENCE

Minutes released one week after the decision, which indicated a worsening economic scenario, with Copom members admitting that expectations are unanchored and beginning to discuss a possible rise in the real neutral rate from the BCB’s current estimate of 4.5%, probably smoothed over the real debate within the Committee, Kanczuk said

While the minutes portrayed the dissenters as arguing in favor of honoring Copom’s previous forward guidance for a 50bp cut, Kanczuk said the reality was probably that there is a deep disagreement about the macroeconomic outlook between the two groups, with the hawks favoring a higher terminal rate in the easing cycle and the doves wanting to reduce rates further. (See MNI POLICY: Copom Dissenters Feared Reaction Function Misstep)

"The Copom minutes tell a story of divergence only concerning the non-fulfillment of guidance, not concerning a divergence in the macro scenario, but we can't believe these minutes, and the market didn't believe them,” he said.

"If there is no difference in the terminal rate, why is this so problematic? Their guidance story, which they tried to tell in the minutes, is that they agree on the terminal rate, and there is a high cost of cutting 25bp instead of 50bp, but that cost doesn't exist because the guidance was already conditional. Roberto, in Washington, said that the guidance had been superseded, so there was no cost anymore," he added.

"They must completely disagree on the terminal rate; it's the only reason I can understand for having a divergence of votes. I see the two groups with completely different opinions on monetary policy, which has nothing to do with the guidance. One group will say, it's over, it's 10.50%, we can't cut anymore, the situation has only worsened, and the other group will say, no, the interest rate is very high, we can keep cutting.”

HIGHER NEUTRAL

For some members, economic and labor market resilience suggest "lower elasticity" of the output gap to monetary policy, which could lead to slower disinflation, the minutes showed.

"It's not the elasticity that is lower, the neutral rate is higher," Kanczuk said. "When I run my model, which is very similar to the Central Bank's, the neutral rate is already above 6%. Brazil has deteriorated, there is more risk, and the neutral rate has risen worldwide."

Dissenters included director of monetary policy Gabriel Galipolo, Paulo Picchetti, Ailton de Aquino, and Rodrigo Alves Teixeira.