MNI BCB WATCH: Copom Sticks With Hawkish Tone, No Cut Hints

The Central Bank of Brazil did not signal a possible cut in January in its decision Wednesday and repeated that the strategy of holding rates at 15% for a "very prolonged period" remains "appropriate," maintaining a hawkish tone that included a renewed warning that it would not hesitate to hike again if necessary.

"The current scenario, marked by heightened uncertainty, requires a cautious stance in monetary policy. The Committee evaluates that the present strategy of maintaining the interest rate at its current level for a very prolonged period is appropriate to ensure the convergence of inflation to the target," the BCB said after unanimously deciding to hold the official Selic rate at 15.00%..

Some analysts were expecting a softer tone that might hint at a possible first rate cut in the first quarter of 2026, but it was not there. Copom even kept a sentence saying they would "not hesitate to resume the rate hiking cycle if appropriate."

There was a small wording change that did not appear consequential-- last month, Copom said that keeping policy at the current level would "be enough to ensure the convergence of inflation to the target."

JANUARY CUT UNLIKELY

This is likely to prompt a postponement of the cuts priced by the market, discouraging bets on a first cut in January. (See MNI INTERVIEW: Brazil Potential GDP Explains Stronger Activity)

On a possibly dovish note, the BCB acknowledged in the statement that headline inflation and measures of underlying inflation "continued to show some improvement" but remained above the inflation target.

"Regarding the domestic scenario, the set of indicators continues to show, as expected, a path of moderation on economic growth, as observed in the latest GDP data release, while the labor market shows resilience," the document stressed.

The Copom’s projection for the second quarter of 2027, now considered the relevant horizon, fell to 3.2% from 3.3%.

"The current scenario continues to be marked by deanchored inflation expectations, high inflation projections, resilience in economic activity and labor market pressures. Ensuring the convergence of inflation to the target in an environment with deanchored expectations requires a significantly contractionary monetary policy for a very prolonged period," the BCB said.

DOVISH HOPES DASHED

A improvement in the outlook had created expectations among market participants that the BCB could begin signaling the start of the easing cycle.

Inflation expectations fell across all projected horizons, including 2025, which after several downward revisions might end within the tolerance band of the 3% target that allows a variation of 1.5 percentage points up or down.

According to the BCB’s Focus market survey, inflation is expected to end the year at 4.40%, down from 4.55% four weeks earlier. For 2026, analysts now project 4.16% (from 4.20%), 3.80% for 2027, and 3.50% for 2028.

Brazil’s IPCA inflation stood at 4.46% in November, down from 4.68% in October.

Inflation moved into the Central Bank of Brazil’s 3% central target range, which allows for a deviation of 1.5 percentage points in either direction. Prices had been above the BCB’s permitted band since October 2024.