MNI Brazil CB Preview – Nov 25: Prolonged Pause Still Required
Executive Summary
- The Copom is widely expected to leave the Selic rate unchanged at 15.00% for a third consecutive meeting on Wednesday, as the committee maintains its hawkish stance to rein in unanchored inflation expectations.
- Though inflation and inflation expectations have been declining gradually, they remain above target and officials have continued to reiterate their high for longer messaging recently.
- Nonetheless, with activity showing some further signs of softening as well, focus will be on the forward guidance and whether there are any signals for a possible rate cut in the near future. For now, many analysts see the easing cycle beginning in the first quarter of next year, although some still see risks of a move in December.
BCB officials have maintained their hawkish stance in recent weeks as they have continued to emphasise their high for long messaging. Speaking recently, BCB monetary policy director Nilton David said that inflation expectations are higher than the central bank would like them, and while he believes the current interest rate is sufficient to bring inflation back to target, it would need a prolonged pause to get there. Although inflation expectations have cooled considerably, he said that they are still far from the target range and remain unanchored, which is still a unanimous discomfort for the committee.
Similarly, BCB Governor Gabriel Galipolo has repeated the familiar rhetoric about the strength of the labour market and signs of a booming economy, while services inflation remains incompatible with target. He also said that there is still a long way to go with monetary policy. These hawkish remarks remain entirely consistent with the messaging at the September Copom meeting, when the committee said that heightened uncertainty still requires a “cautious stance” and that it would remain vigilant to evaluate whether “maintaining the interest rate at its current level for a very prolonged period will be enough to ensure the convergence of inflation to the target”.
