COPOM urges caution while markets price in more rate cuts

By Tuesday (24), the interpretation had gained ground that, even with the war in the Middle East and uncertainty over oil prices, a pause in rate cuts now appears less likely than a possible acceleration in the pace of monetary easing.

The committee sought to sound cautious, saying that its next steps would be determined “over time” amid an uncertain backdrop made even more complex by the war in the Middle East. Even so, it signaled the continuation of a Selic “calibration” cycle after lowering the base rate last week to 14.75% from 15%.

Among market participants, the minutes largely reinforced the message already delivered in the meeting statement. In the section explaining its decision, the committee said that “recent events” would not prevent the materialization of the guidance it had given in January, when it judged that the start of an interest-rate cutting cycle would be appropriate.

COPOM said it had analyzed “the options for the pace of the start of the base-rate calibration cycle” and concluded that a 25-basis-point cut was the most appropriate move at this stage. “The magnitude and duration of the calibration cycle will be determined over time, as new information is incorporated into its analyses,” it said.

In economists’ view, that passage shows an asymmetry in COPOM’s thinking. It would take a worsening of the war, with additional effects on oil prices and the exchange rate, to interrupt the cutting cycle, while any improvement in the external backdrop could allow the pace of cuts to accelerate to 50 basis points with fewer obstacles.

Felipe Sichel, chief economist at Porto Asset, said the minutes brought little new compared with the statement and made clear that COPOM believes rates remain highly restrictive and are having the expected effect on activity.

“The main discussion was about pace and about confirming that we are, in fact, in a rate-cutting cycle. The bar for interrupting that process is currently very high. Barring a disruption in the exchange rate and oil prices, the next moves remain Selic cuts,” he said.

According to BTG Pactual’s team, led by Tiago Berriel, the minutes reinforced a dovish tone by remaining broadly neutral relative to the Central Bank’s earlier communication.

“The minutes are consistent with the view that COPOM left the door open both to accelerate and to maintain the 25-basis-point pace ahead, depending on how the geopolitical backdrop evolves. The bar for interrupting the cycle seems high to us. So if the current scenario holds, our call remains for the cycle to continue with a 25-basis-point cut at the next meeting. A reduction in uncertainty with positive effects on energy prices would lead to an acceleration to a 50-basis-point move,” they said.

War clouds outlook

For Itaú Unibanco, the minutes suggest the Central Bank remains confident in its ability to calibrate the degree of monetary restriction.

COPOM said the magnitude and duration of the cycle will depend on incoming information.

In recent weeks, the war involving Israel, Iran, and the United States has added uncertainty and pushed oil prices higher. Brent crude has traded above $100 a barrel.

“That decision [to cut rates and wait for new information] is consistent with the current scenario, in which the duration and extent of geopolitical conflicts, as well as mixed signals about the pace of economic slowdown and its effects on price levels, make it harder to identify clear trends,” the committee said.

The market was also trying to understand why COPOM projected inflation at 3.3% over its relevant policy horizon, well below what economists had expected.

According to the committee, the oil price is assumed to follow the futures curve for the next six months and then rise 2% a year thereafter. “Given the observed Brent futures curve, this framework translated into a declining path in the second half of the year, after a sharp increase in the short term,” COPOM said.

“In practice, that meant an upward revision to short-term inflation, but with a partial reversal over the relevant horizon, helping keep the projection relatively lower for the third quarter of 2027,” BTG Pactual said.

For Itaú Unibanco’s economics team, led by former Central Bank director Mario Mesquita, the minutes indicate that the authority remains confident in its ability to calibrate the level of monetary restriction despite the global turbulence. “In fact, the minutes suggest that only the options of a 25-basis-point cut or a 50-basis-point cut were on the table,” the bank’s economists wrote.

According to Itaú, COPOM also highlighted that the disinflation process has lost momentum in more recent readings, something that was not in the statement, and that a possible reacceleration in activity in the first quarter “will not imply a major change in its current scenario.” In that sense, the bank said, the minutes are consistent with an acceleration in the pace of Selic cuts in April, to 50 basis points, which would take the rate to 14.25%.

Split signals

J.P. Morgan economists led by Cassiana Fernandez share the view that the next meeting could bring a larger cut. For the bank, the minutes signaled further easing, even as they stressed the uncertainty created by the war and played down the recent improvement in activity data. “It will be important to watch how the Central Bank handles these mixed signals in its estimate of the output gap,” they said.