MNI BCB WATCH: Copom Reiterates Higher For Longer Strategy

The Central Bank of Brazil reinforced a higher-for-longer strategy in its statement Wednesday, taking one more step to curb premature expectations for cuts by saying it will keep borrowing costs elevated for a "prolonged period."

Holding the Selic rate at 15.00% for a second straight meeting, the BCB removed a reference to a "continuation of the interruption" of the hiking cycle from its statement, potentially signaling policymakers are no longer considering raising rates.

"The current scenario, marked by heightened uncertainty, requires a cautious stance in monetary policy. The Committee will remain vigilant, evaluating whether maintaining the interest rate at its current level for a very prolonged period will be enough to ensure the convergence of inflation to the target," the statement said.

The Monetary Policy Committee (Copom) repeated that future monetary policy steps can be adjusted and that it will not "hesitate to resume the rate hiking cycle if appropriate." (See MNI BCB WATCH: Copom Expected To Hold At 15%, Eyes On Next Cut)

The previous document stated that "if the expected scenario materializes, the Committee foresees a continuation of the interruption of the rate hiking cycle to examine its yet-to-be-seen cumulative impacts, and then evaluate whether the current interest rate level, assuming it stable for a very prolonged period, will be enough to ensure the convergence of inflation to the target."

HAWKISH HINTS

One hawkish signal came from the inflation forecast for the first quarter of 2027 — now considered the relevant horizon for monetary policy — remaining at 3.4% despite improvements in current and expected inflation.

In recent weeks, inflation forecasts have fallen across all projected horizons. According to the BCB’s Focus market survey, inflation is expected to end the year at 4.83%, down from 4.95% four weeks earlier. For 2026, analysts now project 4.30% (from 4.40%), 3.90% for 2027 (from 4.00%), and 3.70% for 2028 (from 3.80%).

Along with improved current inflation data, this has brought forward market expectations for potential rate cuts, with some seeing room for a move as early as December. (See MNI INTERVIEW: BCB Likely To Start Cuts In December-Werlang) 

The Focus survey released Monday showed the Selic rate estimate for 2026 falling to 12.38% from 12.50% the previous week. But since Copom uses the Selic path from the Focus survey, keeping the inflation projection at 3.4% suggests this decline in market expectations is not consistent with the board’s strategy.

IPCA inflation was 5.13% in August versus the 5.09% consensus and down from 5.23% in July, Brazilian Institute of Geography and Statistics (IBGE) data showed Wednesday. Despite the improvement, it remains above the upper limit of the BCB's 3% target range, which allows a 1.5-percentage-point deviation in either direction.

The exchange rate also appreciated, with the real trading at 5.31 per dollar now, compared with around 5.60 at the last meeting, at the end of July. Copom also sees a moderation in economic activity despite a dynamic job market.