MNI POLICY: BCB Pause In Sight, But Copom Consensus In Doubt

Brazil's central bank board is increasingly data-dependent ahead of a policy meeting this month that could yield the first pause in cuts after nearly a year of aggressive easing, with a lack of forward guidance making the outcome of this decision especially uncertain, MNI understands.

The lack of clarity is further aggravated by the monetary policy committee's deeply split decision to cut rates by a quarter point to 10.50% last month, which ran contrary to the 50 basis-point cut indicated by forward guidance at the preceding meeting and came with four dissenting votes. (See MNI POLICY: Brazil's Copom Muddles Signal About Terminal Rate)

That division could carry over into this month's Copom deliberations, with doves potentially coalescing around a 25bp cut and hawks -- including Governor Roberto Campos Neto himself -- likely favoring a pause.

Governor Roberto Campos Neto noted Thursday that inflation expectations have moved further from the 3% target for 2024, 2025, and also recently for 2026, pointing to factors including fiscal policy, geopolitical issues, and floods in the south of Brazil, as well as the approaching end of his own term at the end of the year.

"For the first time in a long time, current inflation is relatively contained, but expectations are becoming unanchored," Campos Neto said at a public event, adding that Copom understood there were both upside and downside risks to inflation, and that it was important to keep forward guidance "more open."

The most recent BCB Focus survey showed inflation expectations at 3.86% for 2024, up from 3.88% one week before, at 3.77% for 2025, up from 3.75%, and 3.60% for 2026, up from 3.58%. This deterioration came despite a fall in actual inflation to 3.69% in April, down from 3.93% in March and the seventh consecutive monthly deceleration.

Forecasts for the Selic rate increased to 10.25% for this year, from 10.00%, with one more cut expected in June. However, the group of analysts who see no more room for cuts is growing.

LACK OF CONSENSUS

Copom's next meeting concluding on June 19 will be preceded by May inflation data on June 11 and by two more Focus surveys. The board will also look closely at the long-term rates curve and the exchange rate of the real, which has depreciated from 5.09 at the time of Copom’s last meeting on May 8 to 5.26 on Thursday, weakening to as low as 5.30 the day before.

According to the minutes of the last meeting, dissenters warned of negative consequences from not following the guidance for a 50bp cut. Those who voted for a 25bp move argued that the changes in the economic backdrop had been significant and required a less aggressive loosening of policy, after a more hawkish Federal Reserve outlook and the change in the Brazilian fiscal target for 2025. (See MNI INTERVIEW: Copom To Hold At 10.50%-Ex-BCB's Kanczuk)

There is little reason to believe the two sides of the argument have become any less entrenched since the last meeting.

"The extension and adequacy of future changes in the interest rate will be determined by the firm commitment to reaching the inflation target in the relevant horizon," the statement following that decision said, offering no clue to further steps.

Markets saw political overtones to the split May decision, given that the dissenters were all appointees of President Luiz Inacio Lula da Silva.