MNI INTERVIEW: Mesquita Sees 25BP BCB Hike, 50 Not Ruled Out
MNI (BRASILIA) - The Central Bank of Brazil is likely to initiate a gradual tightening cycle with a 25-basis-point hike to 10.75% this week, although a 50bp increase cannot be entirely ruled out, former BCB deputy governor for economic policy Mario Mesquita told MNI.
"Since the total rate hike cycle they likely have in mind is not overly aggressive, at least for now, and given the communication from the members, it seems that a 25bp hike is more likely. However, a more aggressive move can't be completely ruled out, although reaching consensus on a 50bp hike would be more difficult," Mesquita, now chief economist at Itau Unibanco, said in an interview.
Recent data supports the need for a rate hike, he said.
"The currency has depreciated, inflation expectations have continued to de-anchor, and assessments regarding the degree of economic overheating have more consistently pointed toward strong, perhaps too strong, growth," he said. (See MNI INTERVIEW: BCB 'Dovish Hike' Could Backfire - Volpon)
OVERHEATED ECONOMY
Mesquita, who also worked as an economist at the International Monetary Fund (IMF), noted that this year's growth will be close to 3%, above "even the most optimistic” estimates of potential GDP growth.
"Unemployment is below 7%, which is also below the most optimistic estimates. There are signs of an overheated economy," he said.
The former BCB deputy expects the Monetary Policy Committee (Copom) to follow a 25bp hike this week with two 50bp hikes at subsequent meetings, before finishing its tightening cycle early next year with another 25bp.
"When we input our model, which replicates the central bank's framework, it shows that by mid-next year the inflation forecast for the relevant horizon, which will be 2026, is below the target. Then, we foresee the beginning of a monetary easing cycle," he said.
FED CUTS, BCB HIKES
The purpose of the rate hikes will essentially be to remove stimulus provided during the recent easing period, he said, adding that the start of an easing cycle by the Federal Reserve this week could have a bearing on the BCB’s further meetings. (See MNI INTERVIEW: BCB To Begin Short Hiking Cycle -Megale)
"The board will wait to see what impact a Fed cut will have on the exchange rate and inflation expectations before changing the pace. But I believe Copom will signal in its communication that there is a high chance of accelerating to 50bp at the next meeting," he said.
If Copom indicates that inflation risks remain skewed to the upside despite its likely hike this week, that would be a signal of more vigorous action ahead, Mesquita said,
"The balance of risks might become less skewed to the upside, as Copom would already have incorporated it into the central scenario and would be acting to correct the deviation of projected inflation from the target," he said. "Or perhaps Copom might say that despite having already incorporated part of it, the balance remains skewed to the upside. If you have a central scenario indicating a rate hike and the balance remains asymmetric, you are essentially signaling that at the next meeting, you will accelerate the pace”
In July, the BCB unanimously decided to hold the Selic at 10.5% for a second consecutive meeting, offering no forward guidance for the upcoming sessions. However, minutes from the meeting indicated that Copom would "not hesitate" to hike rates if necessary.