MNI INTERVIEW: Copom To Hold Rates Despite Hawkish Tone -Velho

Brazil's central bank is likely to keep its Selic official rate on hold until the first quarter of 2025, despite the monetary policy committee's hawkish tone in minutes from last week's meeting, former Ministry of Planning and Budget economic advisor Eduardo Velho told MNI.

"As the Copom itself stated, the central bank will not hesitate to raise rates, but we believe it placed more weight on maintaining rates at 10.5% for a longer period until it sees convergence towards the target," said Velho, now chief economist at JF Trust Asset Manager, in an interview.

The BCB held its official Selic rate at 10.50% last week for the second consecutive time after nearly a year of aggressive easing. The minutes from the meeting, released Tuesday, stressed the central bank would not hesitate to raise its benchmark interest rate "to ensure inflation convergence to the target if it deems it appropriate." But the board made clear this does not imply a commitment to any future strategy.

"The market was already expecting the Copom to keep the Selic rate at 10.50% due to the rise in the exchange rate and inflation expectations, which have been increasing slightly. And I think they will continue to rise a bit more. The market was very optimistic and is now adjusting its projections upwards," Velho said.

ABOVE UPPER LIMIT

The former official sees inflation above the upper limit of the target's range, at 4.74% this year, due to the significant depreciation of the real, which he forecasts could be around 20% by December. The BCB's goal is 3%, with a tolerance range of 1.5 percentage points above or below.

"We see the risk of missing the inflation target ceiling for 2025 as well if the dollar doesn't stabilize and continues to rise. In that case, the central bank might revise its internal inflation projections upward, which could lead to an interest rate hike," he said. "But only a sustainable deterioration of the dollar above BRL 5.5 that would raise the central bank's inflation projections to a range of 4% for 2025 and 2026 would justify this rate action," he added.

Velho noted that Copom's inflation projection in the reference scenario is between 3.2% and 3.4% for the first quarter of 2026, a level that also does not justify a rate hike in the upcoming meetings.

GLOBAL STRESS

On Monday, global markets faced extreme stress amid rising fears of a U.S. recession and a sharp unwinding of yen-funded carry trades hitting emerging-market currencies.

"I expect a recovery in Treasury yields, which would indicate that the 'negative stress' in the international financial market was exaggerated and not sustainable," he said.

In his view, the U.S. labor market is slowing down, though not to a "recessionary intensity." (See MNI POLICY: G20 CenBanks Concerned About Rate Normalization)