MNI POLICY: Brazil's Copom Sticks To 50BP Cuts As Doves Fly

Brazil’s central bank is likely to maintain its strategy of reducing interest rates by a steady 50 basis points per meeting despite an apparently dovish rotation among deputy governors on the monetary policy committee, MNI understands.

Market participants expect the Banco Central do Brasil this year to keep cutting the official Selic rate, which peaked at 13.75% and is now at 11.75%, though central bank officials remain data dependent and do not see policy as being on a preset course.

Despite investor expectations that the two new policymakers, picked by President Luiz Inacio Lula da Silva, will be more dovish, two former Copom deputies told MNI that the change is not expected to have a short-term impact.

Both of them feel the BCB's strategy is well-established, and that while there will be a longer-run effect on board discussions, this will largely be felt after the end of 2024, following the conclusion of Governor Roberto Campos Neto's term.

During Copom’s meetings, the central bank’s technical team provides officials with key data and analysis over two days of detailed presentations that help inform policymakers’ decisions. This process significantly raises the bar for dissent against the board’s baseline of internal agreement, said one former deputy.

Copom is looking especially closely at core inflation, service inflation, the output gap, and inflation expectations. Brazilian inflation stood at 4.68% in the 12 months to November, after peaking at 12.13% in April 2021.

DOVES IN, HAWKS OUT

On Tuesday, Paulo Picchetti took over as deputy governor for international affairs and corporate risk management and Rodrigo Alves Teixeira as deputy for administration. They replaced Fernanda Guardado and Mauricio Moura, who were considered more hawkish.

In the past, the governor picked his preferred Copom deputies, and sent their names to the president to sign off on their appointments, but Lula has decided to bypass this procedure with Campos Neto, who was appointed by former president Jair Bolsonaro. The central bank was only granted independence in 2021, so the president has not been able to replace the governor with his own preferred candidate in line with previous practice.

At the BCB’s most recent meeting in December, officials cut rates by a half percentage point and signaled they will continue lowering borrowing costs at the same pace "in the next meetings.” The use of the plural indicated that the committee has effectively committed to 50bp cuts until at least the March meeting.

"If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings and judge that this pace is appropriate to keep the necessary contractionary monetary policy for the disinflationary process," said the statement.