MNI BCB WATCH: Copom Set To Cut Rates In March, Gradual Start

The Central Bank of Brazil signaled it will start a new monetary easing cycle at its next meeting in March, without specifying the size of any prospective move but offering clues that it could be gradual -- possibly a 25 basis point cut to 14.75%.

After holding the Selic rate for the fifth straight time, the Monetary Policy Committee (Copom) said it expects "to initiate the flexibilization of its monetary policy stance in its next meeting," while keeping restrictive monetary policy level "to ensure convergence to the inflation target."

“The commitment to the inflation target imposes serenity regarding the pace and magnitude of the easing cycle, which will depend on the evolution of factors that allow for greater confidence in meeting the inflation target at the relevant horizon for the conduct of monetary policy,” the statement added.

The use of words like “serenity,” “cautious,” and “calibration” suggests the board might begin the easing cycle gradually, with a 25bp cut, despite market pricing for a 50bp reduction, but the decision will depend on incoming data. (See MNI BCB WATCH: Copom Set To Hold Rate At 15%, Eyes On Guidance)

RATE CALIBRATION

“The current scenario, marked by heightened uncertainty, requires a cautious stance in monetary policy. The Committee evaluates that the current strategy has proven appropriate to ensure the convergence of inflation to the target. In a context of lower inflation and more evident monetary policy transmission, the strategy entails interest rate calibration,” Copom stressed.

Copom’s projection for the third quarter of 2027, now considered the relevant horizon, remained at 3.2%, still above the 3% target. “In recent releases, headline inflation and measures of underlying inflation continued to improve but remained above the inflation target,” the statement pointed out.

Regarding the domestic scenario, the board highlighted that indicators continues to show, as expected, a path of moderation in economic growth, while the labor market still shows signs of resilience.

“The Committee continues to monitor the impacts of the geopolitical context on domestic inflation and how developments in domestic fiscal policy affect monetary policy and financial as0sets, reinforcing its cautious stance in a scenario of heightened uncertainty. The current scenario continues to be marked by de0anchored inflation expectations, high inflation projections, resilience in economic activity, and labor market pressures,” Copom said.00