MNI BCB WATCH: Easing Pace Unclear Due To Iran, More Cuts Seen

The Central Bank of Brazil (BCB) opted not to provide guidance on the size of its next rate cut after lowering the Selic rate by 25 basis points to 14.75% Wednesday, as it seeks to monitor developments in the Iran war and their impact on Brazil’s inflation.

As the BCB referred to this first cut as the beginning of a cycle, further reductions are expected in coming meetings, though they could be more gradual than previously anticipated depending on the effects of the war in Iran on Brazilian inflation. 

"The Committee considers the impacts of the Middle East conflicts prospectively, particularly their effects on the global supply chain and commodity prices that directly and indirectly affect inflation in Brazil. Currently, inflation projections for the relevant horizon present additional distance from the target," the statement said.

The board stressed that uncertainty around inflation projections has increased considerably due to the lack of clarity about the duration of the war in Iran and its effects on the conditioning variables of the models. (See MNI BCB WATCH:Analysts Split On Cut Size, 25BP Seen After Iran)

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

BCB'S INFLATION FORECASTS UP

The Monetary Policy Committee (Copom) increased its inflation forecast for the relevant horizon, now set for the third quarter of 2027, from 3.2% to 3.3%, while its projection for 2026 rose to 3.9% from 3.4%, even with a strengthened exchange rate compared to the last meeting in January.

"In the current scenario, marked by heightened uncertainty, the Committee reaffirms serenity and cautiousness in the conduct 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 document said.

Since June last year, Copom had been holding the rate at 15%. Analysts were divided on the size of the cut at this meeting, with some betting on a 50bp reduction.

According to the statement, both upside and downside risks to the inflation scenarios, which were already higher than usual, only  intensified after the beginning of the Middle East conflict.

"Regarding the domestic scenario, the set of indicators continues to show, as expected, a trajectory of moderation in economic growth, while the labor market still shows signs of resilience. In recent releases, headline inflation and measures of underlying inflation continued to show some improvement but remained above the inflation target."