MNI INTERVIEW: Split BCB Vote Sends Political Message-Velho

Investors see political overtones in the Central Bank of Brazil's divided vote to slow the pace of interest rate increases this week, former Ministry of Planning and Budget economic advisor Eduardo Velho told MNI, though he added that it is now likely that Copom will cut at a rate of 25 basis points in its coming meetings.

"What was interesting in the split of votes was the anticipation of the debate about the succession of the governorship and a possible government influence on Copom's decisions after [Governor] Roberto Campos Neto's term ends. All the directors appointed by President Lula voted in favor of a 50bp cut, which possibly sends a message," he said in an interview.

The BCB reduced its official Selic rate by 25bp to 10.50% Wednesday in a decision that saw four deputies -- Gabriel Galipolo, Paulo Picchetti, Ailton de Aquino, and Rodrigo Alves Teixeira -- dissent in favor of the 50-point cut indicated by the prior meeting's guidance. All dovish votes are appointees of President Luis Inacio Lula da Silva. (See MNI INTERVIEW: Brazil Could Hike Rates In 2025 - Ex-BCB Serra)

"The highlight of the decision was the split vote, but I don't think unanimity was expected anyway. The market's expectation was a split vote," emphasized Velho, now chief economist at JF Trust Asset Manager.

"Volatility in the interest rate market when there are dissenting votes seems to be becoming more frequent. Now the terminal rate appears to be higher than the 9.63% forecasted by Focus," noted the economist.

BOARD DIVIDED

For Velho, it is likely that decisions will remain divided at the next few meetings, but much will depend on the behavior of inflation expectations. "I think that most probably they will maintain a pace of 25bp cuts. My question is whether they will stop at 10% or go below 10% by the end of the cycle," he said.

In his view, the lack of guidance means that the cycle is already in the process of ending. "Removing guidance, for me, was prudent because the scenario is more uncertain. The interpretation is that there is less room for interest rates to fall." (See MNI INTERVIEW: BCB Still Likely To Cut By 50 In May-Figueiredo)

"The big question is that this divergence further reinforceda uncertainty about the direction of future monetary policy, the direction of interest rate management, in a pre-election environment. For example, 2025 is a pre-election year for the presidency. It's a year when the country needs to grow more, perhaps create more jobs. What will be the central bank's action in this context? What will be the decision, for example, regarding the commitment to the inflation target for 2026 and 2025? That's the point," he said.

NEW TARGET SYSTEM

Velho also recalled that the government has moved the inflation-targeting system to a continuous target of 3%, which gives more flexibility for monetary policy. This change has not yet been formalized, but when it was announced last year, was informed that the new rule would take effect in 2025. Currently, the central bank needs to pursue the goal for the calendar year, always determined in December.