MNI WATCH: BCB To Slow Hiking Pace, Magnitude Still Uncertain
MNI (BRASILIA) - The Central Bank of Brazil signaled a smaller rate hike at its next meeting in May, though the magnitude is not clear yet, while the slowing pace of tightening suggests the cycle may be nearing its end.
"In light of the continuation of the adverse scenario for inflation convergence, the heightened uncertainty and the lags inherent to the ongoing monetary tightening cycle, the Committee anticipates an adjustment of lower magnitude in the next meeting, if the scenario evolves as expected," the statement said.
The forward guidance accompanied Wednesday’s decision to raise the Selic rate by 100 basis points to 14.25%, the highest level since August 2016. The move marked the fifth consecutive increase in rateand the third of 100 basis points.
"The current scenario is marked by additional deanchoring of inflation expectations, high inflation projections, resilience on economic activity and labor market pressures, which requires a more contractionary monetary policy," the board added.
According to the BCB Focus market survey, analysts expect the Selic rate to rise to 15% this year before falling to 12.50% next year and reaching 10% in 2028. This path includes a 50-basis-point hike in May and a final 25bp tightening move in June.
Even with economists pricing in a 50bp move at the next meeting, the Monetary Policy Committee (Copom) could hike by 75bp or even 25bp depending on upcoming data, as the magnitude was not specified.
MONETARY POLICY LAGS
The board argued that monetary policy acts with "lags" and noted that they observe "signals that suggest an incipient moderation in growth," despite inflation remaining above the 3% target.
The Focus survey shows that inflation is set to end the year at 5.66%, exceeding the upper limit of the 3% target tolerance range, which allows for a maximum of 4.5%. Expectations remain unanchored over longer horizons, with forecasts at 4.48% for 2026, 4.00% for 2027, and 3.78% for 2028.
The BCB’s official inflation forecast was revised down to 5.1% for 2025, from 5.2%, and to 3.9% for the third quarter of 2026, from 4%, which is the relevant horizon for monetary policy.
BALANCE OF RISKS
The statement highlighted that the balance of risks to its inflation scenarios remains tilted to the upside.
"Beyond the next meeting, the Committee reinforces that the total magnitude of the tightening cycle will be determined by the firm commitment of reaching the inflation target and will depend on the inflation dynamics," added the board.
The board's January decision, when the Monetary Policy Committee (Copom) hiked rates by 100bp to 13.25%, had guided for one more increase of the same size at the March meeting.
TRUMP'S TARIFFS
Copom said the global environment remains challenging particularly in the United States, "mainly due to the uncertainty about the trade policy and its effects."
"This scenario poses even more questions about the pace of economic deceleration, disinflation and, consequently, about the Fed's monetary policy stance and the pace of growth in other countries."
"The Committee judges that the external environment continues to require caution from emerging market economies," Copom said. (See MNI INTERVIEW: BCB To End Hiking Cycle At 14.75% - Kfoury)