MNI Brazil CB Preview- Jun 25: Hike Or Hold, Caution to Remain

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Executive Summary

• A narrow majority of analysts lean towards the BCB keeping the Selic rate steady in June at 14.75%. This follows lower-than-anticipated inflation figures last week, better behaved inflation expectations and the strong performance for the Brazilian real across 2025.
• However, with economic activity appearing resilient and the labour market still tight, the Copom may opt to hike rates by a further 25bp, as the committee continues to stubbornly pursue the convergence of inflation to target.
• BCB officials have clearly indicated that rates will then remain high for longer to ensure the re-anchoring of inflation expectations, while guidance at this juncture will likely not commit to a definitive end to the cycle.

After 425bp of rate hikes since September, recent softer-than-expected inflation data, moderation in inflation expectations and BRL gains bolster the case for the Copom to remain on hold this week. The decision will be a close call however, with risks of a further hike, as inflation and inflation expectations remain above target despite the recent improvement, and the economy is continuing to grow at an above-trend pace. Ongoing fiscal uncertainties also keep pressure on the Copom to maintain a hawkish stance, regardless of its decision on Wednesday.

Following the expected 50bp Selic rate hike in May, the Copom struck a slightly more dovish tone as it noted that the risks to inflation are now more symmetric and that the risks – both to the upside and downside – are higher than usual. The committee provided no guidance for the meeting this month, given the heightened uncertainties and advanced stage of the tightening cycle, which it said requires additional caution and flexibility to respond to the incoming data. Notably, the Board signalled that the scenario requires a “significantly contractionary monetary policy for a prolonged period” to ensure the convergence of inflation to target.