MNI INTERVIEW: Hawkish BCB Even More Data-Dependent - Volpon

Brazil's Central Bank has shifted its policy communication in a hawkish direction that makes policymakers even more data dependent, but also likely raises the level at which rates will bottom for this cycle, the BCB's ex-deputy governor for international affairs Tony Volpon told MNI.

Volpon believes the change in guidance leaves the probable terminal rate closer to 10%, up from the 8.5% currently priced by market. Following a 50bps cut in the Selic rate to 10.75% Wednesday, Copom members indicated they expect an additional cut of the same size at the "next meeting," after previously saying half-point moves were forthcoming at the "next meetings."

"Copom pointed out an increase in domestic uncertainty, which was the rationale for abandoning forward guidance. It's a more hawkish move, especially on a day when the Fed surprised on the dovish side," said Volpon, who is now a professor at Georgetown University. Still, he added, "the baseline scenario hasn't changed substantially."

Volpon thinks Copom will slow the pace of monetary easing at some point after delivering consistent 50bp cuts since it began reducing borrowing costs back in August of 2023.

"It's like when a pilot announces they're in the landing procedure. That's what they signaled, 'we are in the landing procedure.' An interpretation is that they are signaling that perhaps the terminal rate might be higher than what the market was anticipating. So, let's see if this becomes clearer in the minutes," said the former official. (See MNI BCB WATCH: Guidance Shift Makes Rate Path Less Certain)

HIGHER TERMINAL RATE

Volpon highlighted that markets would probably start pricing in a higher terminal rate, but that doesn't mean Copom will stop cutting rates in June. The Focus BCB market survey forecasts for the Selic are at 9.00% for the end of 2024 and 8.50% for 2024. "It means they will either slow down or make a decision at the meeting with the available data," he evaluated.

He sees no chance that Copom might have to reverse course and raise interest rates again. "There's no scenario of raising interest rates again. The decision will always be whether to cut or not. And I think it's more likely there will be some additional cuts," he said.

"If Copom has already started the landing process of the plane, it needs to slow down before stopping. If the debate will be whether to continue with a 50bp cut or reduce it to 25bp, I think now it's more towards 25bp. Perhaps the terminal rate of the cycle is closer to 10%," he added.

He emphasized that Copom's projections are still above the 3% target -- at 3.5% for 2024 and 3.2% for 2025 -- with the assumption of a 9% Selic rate by the end of this year and 8.5% for year-end 2025. Also, Focus expectations slightly increased this week to 3.79% this year, from 3.77%, and to 3.52% for 2024, from 3.51%.

"There's uncertainty (affecting inflation expectations) that will only be resolved when the new central bank governor takes office and when that person, appointed by (President) Lula, truly proves through actions that they are independent (from the government) and will act independently and are committed to the inflation target," Volpon said.

"Until then, the market will operate with a certain premium. We should note that all of Lula's government appointees agree (with the decision and the change in guidance). There was no dissent."