MNI INTERVIEW: New Brazil Guidance Doesn't Mean Slower Easing

The hawkish shift in the Central Bank of Brazil’s guidance doesn't necessarily mean it will decelerate the pace of rate cuts in June, the former head of the BCB’s open market operations department Sergio Goldenstein told MNI, adding that the board wants to give itself more room to respond to data while its official forecasts point to inflation only slightly above the 3% target for 2025.

Following a 50-basis-point 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," in May, after previously saying half-point moves were forthcoming at the "next meetings." While some in the market have interpreted this as implying a reduction in the pace of cuts from June, Goldenstein said this was not necessarily so. (See MNI BCB WATCH: Guidance Shift Makes Rate Path Less Certain)

"The central bank isn't signaling a reduction in the pace of cuts to 25bp. The board wanted to gain some degree of freedom," Goldenstein, now chief strategist at Warren Rena, said in an interview. "Reducing the guidance horizon doesn't signal an intention to slow down in June, though this is something that will be discussed. I think the central bank just didn't want to commit to the pace of 50bp - the board is now more dependent on data.”

SAME SELIC RATE

The guidance change has not led him to adjust his Selic forecast for the low point of the easing cycle, which he sees at 9.00%. "We've maintained the pricing of the terminal Selic rate of 9.00%, but we think there will be two more cuts of 50bp and then the BCB would drop to 25bp, with three final cuts of 25bp. Previously, we thought it would go at a pace of 50bp and one more of 25bp," he said. (See MNI INTERVIEW: Hawkish BCB Even More Data-Dependent - Volpon)

Expectations have "hardly moved" despite the change in guidance, Goldenstein said.

"The central bank's inflation projection for 2025, which is the focus of monetary policy now, is very close to the target, at 3.2%. And when the central bank runs the model, it uses the interest rate trajectory from [the central bank’s Focus survey], which is for a Selic at 9% in 2024 and 8.5% in 2025.”

Although the central bank has signaled an increase in uncertainty, Goldenstein noted that this had not been sufficient to prompt Copom to change its assessment of the balance of risk. "I think it even helps calm things down a bit, in the sense that the central bank doesn't see a significant deterioration in the risk balance,” he said.

"The BCB is concerned about an increase in uncertainty in both the international and domestic scenarios. Previously, it only referred to the international context. Given that there have been no fiscal novelties in the recent period, perhaps it indicates a greater degree of concern from the central bank regarding demand for services and also labor market activity. We'll have to wait for the minutes to get more details.”

Minutes from the meeting will be released on Tuesday.

While fiscal matters are always a concern, the BCB also highlighted the risk of a tight output gap, especially if the labor market and activity continue to surprise to the upside, Goldenstein said.