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MNI INTERVIEW: No Acceleration Of Brazil Rate Cuts - Le Grazie

Reinaldo Le Grazie, former Brazilian central bank deputy for monetary policy


The Central Bank of Brazil is not in a position to consider accelerating rate cuts, former deputy governor for monetary policy Reinaldo Le Grazie told MNI, adding that long-term inflation expectations remain worryingly above target and that fiscal imbalances will continue to feed price pressures, particularly in the second half of the year.

The BCB’s monetary policy committee, Copom, is likely to keep to its current guidance in March and maintain its current pace of 50-basis-points in reductions per meeting until June, after which it will have to consider signalling that the end of the easing cycle is in sight, Le Grazie, now a partner at fund manager Panamby Capital, said in an interview.

On Wednesday, the BCB reduced its official rate by 50bp to 11.25% for the fifth consecutive time and indicated more cuts of the same magnitude would come in the "next meetings," effectively committing policymakers to the current pace of easing until at least the May decision. (See MNI: Inflation Expectations Seen Key To Pace Of Brazil Easing)

By June the Selic will have reached 9.75%, closing in on the cycle low of 9% anticipated by the market according to the BCB’s Focus survey, noted Le Grazie.

“They will have to change the guidance by then,” he said, adding that he expects that the low point for rates will come between 9.25% and 9.5%.

"I think accelerating the pace is out of the scenario, though some managers are already talking about an 8% terminal rate. I can't see how it would be possible, because to achieve 8% they would have to speed up and continue cutting rates until the last meeting of the year,” said Le Grazie.

"The March meeting is likely to be 'copy and paste' again," he said in reference to Wednesday’s statement, which was almost identical to December's. Brazil's easing cycle started in August last year after the interest rate peaked at 13.75%.

Copom forecasts inflation of 3.5% for this year and 3.2% in 2025, above the 3% center of its target, while the BCB's Focus Market Survey projects 3.5% for both years. Given the lagged impact of monetary policy, the central bank is now more focused on next year’s price performance.


Increasing capital inflows should boost Brazil’s currency, the real, in the first half of the year, helping to contain price increases over 2024 as a whole despite an inflationary impulse in the second half from the government’s increasing fiscal deficit, Le Grazie said.

The federal government ended 2023 with a BRL230.5 billion deficit, the second-largest in history and exceeded only by 2020 when public spending spiked during the Covid pandemic. This year’s municipal elections should also add to fiscal pressures, Le Grazie said.

While in its statement released Wednesday, Copom emphasized that economic activity is "consistent with the scenario of deceleration,” Le Grazie was unsure.

"I'm not sure the economy is slowing down, excluding the agricultural effect, it doesn't seem to be decelerating," he said. (See MNI POLICY: Brazil's Copom Split Over Potential Growth Spike)

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