Central Bank may slow cuts after lowering Selic to 14.25%

As Valor had reported earlier in the week, most financial-market participants expected the rate cut. What they did not expect was a statement referring to the quarter after the so-called “relevant horizon,” the period the Central Bank uses as a benchmark for its decisions and that reflects the time needed for monetary policy to take effect. That horizon had been the fourth quarter of 2027, but the statement mentioned the first quarter of 2028.

“It is commendable to work with an alternative scenario, but if the Central Bank usually looks at the relevant horizon, why does it mention the following quarter? In practice, the authority extended that horizon. This raises the question of whether the relevant horizon is now the one that allows it to cut rates,” said Gino Olivares, chief economist at Azimut Brasil Wealth Management. “It is contortionism to be able to continue cutting [the Selic].”

Paulo Val, chief economist at Occam Brasil, raised a similar point. In his view, the extension of the inflation-convergence horizon comes at a time when the monetary authority should be more “cautious.” “The Central Bank should shorten the convergence horizon, not extend it. By signaling that it may be looking further ahead [than it should], it may contribute to a deterioration of longer-term horizons,” he said.

Luciano Sobral, chief economist at Neo Investimentos, said the Central Bank is moving away from a model to which it had tied itself in the past and that is now creating problems for the authority. “I just don’t know how it will get out of this trap,” he said, adding that this departure from the model is likely to create noise among financial-market participants. “The market demands a lot of consistency and adherence to the model, and this deviation by the Central Bank will bring it a lot of criticism,” he said.

Laiz Carvalho, Brazil economist at BNP Paribas, sees it differently. She said expanding the relevant horizon was more of an “attempt to signal what may happen in 45 days, assuming the alternative scenarios.” “I don’t think the fact that it talked about the first quarter of 2028 now means it can talk about that all the time. I think it did this to show that the door is more closed to a 25-basis-point cut than before,” she said.

Door left open

The statement did not give firm guidance on future decisions, leaving the door open to further cuts amid unanchored expectations and the inclusion of fiscal stimulus to consumption in the balance of risks for higher inflation.

Copom therefore stressed that its next steps will depend on “new information.” It also said uncertainty around the projections remains higher than usual. For the relevant horizon of the fourth quarter of 2027, the Central Bank’s IPCA inflation forecast rose to 3.7% from 3.5% in the previous statement.

On the projection, Carvalho said it would be important for the Central Bank to explain in next week’s minutes how it arrived at 3.7%. “Taking into account the relevant horizon of the fourth quarter of 2027, our inflation forecast is 3.6%. This shows that the Focus survey projection for the Selic, at 13.75% this year and 12% in 2027, is not enough to bring inflation to the target,” she said. “I need an alternative scenario above Focus to get close to convergence to the target,” she said.

Sobral said Copom is showing that the scenario has worsened, but that there is still room to cut rates. “What the Central Bank is indirectly communicating is that the interest rate is very high and that it is very far from the neutral rate, so it can accommodate a clearly worse scenario,” he said. “But the postwar world has become more complicated. Even if oil falls back below $80 a barrel, inflation expectations are unlikely to improve,” he said.

Olivares also sees the scenario with greater concern, especially because of a more conservative Federal Reserve. “In this globalized world, how can you be out of step with the [interest-rate] cycle of the largest economy without seeing your currency lose value?” he said, referring to the fact that a smaller interest-rate differential tends to pressure the exchange rate, while a weaker real would add another source of inflationary pressure. “There was a very clear surprise in the United States at this meeting, with the Fed proving more cautious than expected.

“If it is more conservative, we have to recognize our insignificance as a small economy,” he said. “The Central Bank can argue that the level of interest rates is very restrictive. But then why is inflation still above the target and activity still strong? Something does not add up.”

Case for a pause

Val said the current scenario would be consistent with the end of the easing cycle. “We are seeing the economy grow and real income gains. Inflation is also deteriorating in a real way. These levels are incompatible with meeting the target.”