MNI Brazil CB Preview - Mar 26: Cautious Start to Easing Cycle
Executive Summary
- The Copom is widely expected to begin an easing cycle on Wednesday, although the market remains split over whether it will start with a 25bp or 50bp move, with an outside risk of no change.
- Despite uncertainty over the outlook for the conflict in the Middle East and the associated surge in crude oil prices, BCB director Nilton David said recently that the guidance for a calibration of monetary policy this month remains valid.
- The decline of inflation indicates that the tight monetary policy stance is working. However, upside risks have risen, and inflation expectations remain unanchored and far from target, suggesting that the Copom will proceed cautiously with any rate cuts to keep monetary policy well inside restrictive territory for some time.
At its previous monetary policy meeting in January, the Copom removed the tightening reference from its forward guidance and signalled a likely start to the easing cycle in March, stating that “in a context of more evident lower inflation and monetary policy transmission, the strategy entails interest rate calibration”. Looking ahead, it said that if the expected scenario is confirmed, it foresees “to initiate the flexibilization of its monetary policy stance in its next meeting”. However, it emphasised that it “will keep monetary policy at a contractionary level to ensure convergence to the inflation target”.
Since then, inflation has continued to moderate, while activity has remained below trend. Although the outbreak of the conflict in the Middle East and the associated surge in crude oil prices has clouded the near-term outlook, BCB director David’s remarks that the central bank’s guidance remains valid still points to the likelihood of a start to the easing cycle this week, even if the size of the initial cut remains unclear.
