Only 9 of the 132 analysts surveyed by Valor anticipate a rate decrease in upcoming Central Bank decision

06/17/2024

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Laiz Carvalho — Foto: Nilani Goettems/Valor

The outlook for Brazil’s monetary policy indicates that the period of monetary easing may have concluded. The recent depreciation of the real and the uptick in inflation expectations, pushing the exchange rate to around R$5.4 per dollar, have solidified this perspective among financial market analysts. In the upcoming Central Bank’s Monetary Policy Committee (COPOM) meeting, scheduled for this Wednesday, the Selic rate (Brazil’s benchmark interest rate) is expected to remain at 10.5% per year, as anticipated by the vast majority of market participants surveyed.

Out of 132 institutions polled, only nine predict a 25-basis-point reduction in the policy interest rate this week. Furthermore, expectations for the end-of-year Selic rate do not foresee any cuts, with only 33 out of the surveyed institutions—about a quarter—anticipating a potential easing of rates in 2024.

Recent concerns over economic policy have significantly impacted Brazilian asset prices, with the exchange rate climbing from R$5.15 to nearly R$5.40 since the last COPOM meeting in May, and future interest rates have surged, occasionally crossing the 12% threshold.

Amid concerns about inflation’s trajectory, following the Central Bank’s split decision in its last meeting, medium-term inflation expectations appear to have become untethered. Inflation projections for the Consumer Price Index (IPCA) in 2025 in the Focus Bulletin have escalated from 3.64% to 3.78%, moving further from the target set by the Central Bank. Similarly, forecasts for 2026 have also increased from 3.50% to 3.60%.

This trend was confirmed by a Valor survey, which highlighted a rise in the median inflation estimate for 2025 from 3.62% to 3.80% in its May edition.

In light of these developments, market participants increasingly believe that the Central Bank may have no choice but to conclude its monetary easing cycle for the foreseeable future. Despite these challenges, there remains a consensus among surveyed experts for a unanimous decision within the Central Bank’s policy-making body in their baseline scenarios.

“We ended up moving towards the view that, in order to control the worsening of inflation expectations, the COPOM will have to pause [the cycle] and seek unanimity. The exchange rate has risen, inflation has shown some slightly more annoying signs, and activity remains strong,” said Anna Reis, chief economist at Gap Asset.

She anticipates that the COPOM’s inflation projection for 2025 will drift further from its target due to deteriorating exchange rates and Focus survey expectations. “We think it should go from 3.3% to 3.4% or 3.5%. And the Central Bank should also revise its neutral interest rate projection to 5% in real terms in the Inflation Report, which would be another reason for this projection to approach 3.5%,” she notes.

Ms. Reis also highlights the uncertainty around how the collegiate body will communicate this policy shift. “Given that it’s going to pause, it’s expected that the statement will be hawkish. It will probably weigh heavy on expectations. What I will monitor is whether it will signal a pause in the cycle of cuts or treat it more as an interruption,” she adds.

In BNP Paribas’ view, the COPOM is unlikely to completely dismiss the possibility of rate cuts in 2024, positioning itself in a “data-dependent” stance while aiming for convergence in expectations. They forecast the basic interest rate will remain at 10.5% by the year’s end.

“I believe that the COPOM members’ discourse will be more unified this time. The split decision brought a lot of volatility to the market, and from recent communications, we have seen the members trying to bring a more unified discourse,” said Laiz Carvalho, BNP Paribas’ economist for Brazil. She outlines two potential outcomes: a unanimous decision to hold the interest rate at 10.5% per year or a majority decision with 7 votes for a pause and 2 against.

Despite these efforts, Ms. Carvalho doesn’t foresee an immediate effect on re-anchoring inflation expectations. She identifies three main drivers behind the rising projections for IPCA in 2025 and 2026. “The first involves increased inflationary pressures in 2024, potentially triggered by the tragic events in Rio Grande do Sul, global geopolitical tensions, or rising inflation abroad. The second factor is ongoing fiscal uncertainties. As I project a deficit of 0.7% in 2024 and 1% in 2025, contrasting a government projection of 0%, the fiscal risk is included in the inflation projections. This will only become clearer around August, with discussions for the 2025 Budget. The third factor, though not influential in my projections, is market concerns about a potentially more lenient stance from the Central Bank starting next year,” said the BNP Paribas economist.

Likewise, Claudio Ferraz, chief economist at BTG Pactual, also weighs in, warning that any dissent could severely destabilize inflation expectations.

“A possible lack of unanimity in the decision, even if it’s not as extensive as the split we saw at the May meeting, would still significantly impact expectations negatively. In addition, doubts persist about the Central Bank’s communications strategy. There’s uncertainty about whether this meeting will end without clear future guidance or if it’ll signal a pause in rate adjustments or something similar. I believe mentioning a pause now could exacerbate concerns, worsening expectations, even if the decision to pause is unanimous,” he added.

The chief economist of XP Asset, Fernando Genta, also expects a score of 9 to 0 for the maintenance of the Selic but ponders that the race for the presidency of the monetary authority can be a risk. “The prospect of maintaining the Selic rate is quite strong, with a 9 to 0 vote expected, but there’s an additional variable in play—the race for the Central Bank presidency. Even though each director is independent, their aspirations might influence their votes. This doesn’t imply that any director is indifferent to inflation concerns, but it does introduce some uncertainty into the voting dynamics.”

Other experts also noted the importance of watching how political reactions unfold post-decision, especially regarding criticism aimed at government-appointed members who might vote to pause the rate cuts.

Despite some optimism among traders, the current economic climate poses challenges for lowering interest rates. Anna Reis of Gap Asset, however, sees potential for rate cuts later this year. She predicts, “Given our inflation projection of 3.7% for 2025 and a current Selic rate of 10.5%, we’re looking at nearly 7% real interest. As the monetary policy horizon shifts towards 2026 in the latter half of the year, if the COPOM’s inflation forecast begins to dip below 3%, we might see rate reductions resuming.”

She anticipates two quarter-point cuts in the final COPOM meetings of the year, supported by expected monetary easing in the United States that could strengthen emerging market currencies. “The U.S. Federal Reserve is expected to start reducing interest rates in September. Even if this shift is delayed to November, the U.S. would be on the brink of making those cuts. This adjustment could enhance the second half of the year, potentially strengthening emerging market currencies,” she notes.

BNP Paribas, on the other hand, expects rate cuts to be delayed until 2025, aligning with the global trend of easing monetary policies. The French bank predicts a total reduction of 100 basis points in the Selic rate next year, aiming for a target rate of 9.5% per year.

*Por Gabriel Roca, Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/