MNI INTERVIEW: BCB Could Deliver 50BP Cut In Jan, Velho Says

The Central Bank of Brazil is likely to begin its easing cycle with a 50-basis-point rate cut in January, though a smaller 25-basis-point reduction in December is also possible, former Ministry of Planning and Budget economic advisor Eduardo Velho told MNI.

"My call is that the Copom will start cutting in January, but there’s a possibility it could move in December. If it happens in December, the cut will likely be 25 basis points, and if it starts in January, it will probably be 50 basis points," Velho, now chief economist at Equador Investimentos, said in an interview.

The BCB’s Monetary Policy Committee (Copom) kept the Selic rate at 15% in September, and said monetary policy should remain significantly contractionary for a prolonged period. (See MNI INTERVIEW: BCB January Rate Cut Likely, Can Delay - Kawall)

Velho emphasized that the appreciation of the real was key to the improvement in current inflation which, after several downward revisions, should end the year around 4.5%, within the tolerance band of a 3% target that allows for a variation of 1.5 percentage points up or down.

“I think it’s very important for the dollar to stay at a lower level. Of course, the central bank doesn’t have an exchange rate target, but they know that the real’s appreciation was crucial to bringing down inflation and short- and medium-term expectations, as well as food prices," he stressed. 

HAWKISH TONE

In his view, the BCB will not soften their tone, probably keeping a hawkish stance and saying inflation is still above target. "They’ll also highlight that the slowdown in activity remains gradual, which should discourage bets on a possible December cut."

Regarding U.S. trade policy and the 50% tariff imposed on Brazil, he said the decline in exports to the United States was offset by sales to other markets, so the impact was quite limited.

“Brazil managed to diversify its exports, increasing volumes to the Middle East, Argentina, and other OECD countries.” (See MNI INTERVIEW: BCB To Hold Until 2026 To Preserve Credibility)

The central bank needs to wait a bit longer to see whether a rate cut in December is possible, he added, noting that the bank is “winning the battle” on inflation expectations, which are becoming re-anchored, reinforcing a more positive outlook for next year.

Overall, he said the tariffs had a positive impact on President Luiz Inácio Lula da Silva’s popularity and eased pressure on the central bank. He also noted that the labor market is showing some signs of slowdown as a result of the tight monetary policy.