MNI POLICY: Brazil Guidance Shift Needn't Alter Terminal Rate

A shift in Central Bank of Brazil forward guidance that some have interpreted as hawkish would be compatible with a slower pace of rate cuts that extends the easing cycle but still reaches the same terminal rate, MNI understands.

Following a 50 basis-point cut in the Selic rate to 10.75% on Wednesday last week, 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." (See MNI INTERVIEW: New Brazil Guidance Doesn't Mean Slower Easing)

Market participants interpreted this change as a warning that the 50bp pace could be reduced to 25bp in the June meeting or even that the Selic could end this year and next at levels higher than the 9.00% and 8.50%, respectively, which are currently anticipated. But the meeting’s minutes, released on Tuesday, stressed that the new language leaves the monetary policy committee Copom's central outlook unchanged. "It was emphasized that it would be a mistake to interpret the change in future signaling as an indication of a change in the monetary policy cycle compatible with the baseline scenario," the document showed.

According to the minutes, "some members" of the board argued in favor of a deceleration in the easing cycle pace if "uncertainty remains high in the future," for whatever terminal rate BCB is attempting to reach. So far official documents and speeches by Copom members have avoided any indication of the easing cycle’s low point.

SEEKING FREEDOM

The main motivation for the BCB decision in removing the plural from its guidance was to gain more room for maneuver and time to react to new data, especially given higher uncertainty regarding both domestic service prices disinflation and the path of Federal Reserve policy in the U.S., MNI understands. (See MNI BCB WATCH: Guidance Shift Makes Rate Path Less Certain)

"Some members also argued that if prospective uncertainty remains high in the future, a slower pace of monetary easing may prove appropriate, for whatever terminal rate is desired," the minutes said.

Before the decision, BCB Deputy Governor for Monetary Policy Gabriel Galipolo said Copom would eventually remove the plural from the guidance. Governor Roberto Campos Neto and Deputy for Economic Policy Diogo Guillen had offered a similar view, highlighting that the same path could be achieved with or without explicit guidance. (See MNI INTERVIEW: Hawkish BCB Even More Data-Dependent - Volpon)