MNI BCB WATCH: Cautious Cut While Inflation Forecasts Rise

The Central Bank of Brazil continued its easing cycle while reinforcing a cautious message Wednesday, cutting rates by 25 basis points to 14.50% even as its inflation projections moved higher over the relevant horizon.

At the same time, the board justified the move by noting that uncertainty surrounding the forecasts had increased.

Copom’s forecast for inflation in the fourth quarter of 2027 -- now considered the relevant horizon -- is 3.5%, above the 3.3% projected at the previous meeting, when the board was targeting the third quarter of next year.

In other words, even after rolling the horizon forward by three months, the projection continued to rise, which in theory could require a more cautious stance, since by that period the shocks from the war would likely have dissipated, unless the scenario is one of a long-lasting conflict.

Even so, when a shock lasts for a long time, second-round effects are almost inevitable and would likely become a focus for the central bank.  (See MNI BCB WATCH: Cautious 25bp Cut Seen Amid War Uncertainty)

NO GUIDANCE ON SIZE

For upcoming meetings, the BCB indicated it will continue calibrating the interest rate, but gave no guidance on the size of future cuts.

"In the current scenario, marked by heightened uncertainty, the Committee reaffirms serenity and cautiousness in the conduction of monetary policy, so that future steps of interest rate calibration can incorporate new information about the depth and duration of the conflicts in the Middle East, as well as their direct and indirect effects over time on the price level," the English version of the statement said.

The Monetary Policy Committee (Copom) stressed that the effects of the Iran war on the global supply chain and commodity prices would directly and indirectly affect inflation in Brazil.

"Currently, inflation projections for the relevant horizon for the monetary policy present additional distance from the target," the board pointed out.

UNCERTAINTY AROUND INFLATION FORECASTS

They emphasized that the uncertainty around those projections has considerably increased, due to the lack of clarity about the duration of the conflicts and their effects on the conditioning variables of the projection models.

"The Committee deemed it appropriate to proceed with the monetary policy calibration cycle, insofar as the prolonged period of the Selic at a contractionary level provided evidence about monetary policy transmission to the economic deceleration, creating the conditions under which adjustments to the pace and extension of this calibration, in light of new information, can be made so as to ensure convergence to the inflation target," the central bank said.

In the board’s view, recent activity data show a recovery relative to the fourth quarter of 2025, while remaining consistent with a broader deceleration path for full-year 2026, contrasting with inflation expectations remaining deanchored, inflation projections elevated, and labor market pressures persistent.

"In recent releases, headline inflation and measures of underlying inflation have risen, moving further away from the inflation target," the statement said.