MNI INTERVIEW: BCB Hold Until 2026, Early Cut Possible -Kfoury

The Central Bank of Brazil is likely to hold its interest rate at 15.00% until next year, with a small possibility of a December cut if the outlook, and especially inflation expectations, continue to improve, the former head of the BCB’s department of economic research Marcelo Kfoury told MNI.

"I think the scenario still needs to improve significantly for an earlier rate cut," said Kfoury, who participated in Copom meetings as a non-voting member until 2006 and is now a professor in the finance department at Fundacao Getulio Vargas.

But there has been some clear improvement in the monetary policy outlook, he noted.

"Both things are kind of happening at the same time — inflation is falling and activity is decelerating,” he said. "The labor market is not showing much of this yet, but there’s usually a lag, and credit is also slowing. Still, inflation needs to improve a lot more.”

Kfoury noted that the last three inflation prints showed progress, and there was a slight improvement in expectations, more for this year than for next. "But I think, basically, expectations and the central bank’s own projections need to improve."

HOLDING RATES UNTIL JANUARY

He believes the Copom will hold until January, with a lower probability of a start to cuts in December. "Real interest rates are very high. If the exchange rate continues to appreciate, wholesale prices remain low, and all these factors come together, expectations could improve," he said.

The BCB last month held its official Selic rate, saying that the "interruption of the rate-hiking cycle" will continue in further meetings to allow it time to "examine its yet-to-be-seen cumulative impacts."

The former BCB official stressed that long-term expectations remain unanchored at around 4% because historically the country has struggled to keep inflation below that level. “I think there’s a certain inertia and a structural inflation that makes it harder for expectations to drop below 4%,” he said.

His inflation forecast is 4.96% for this year and 4.18% in 2026. (See MNI INTERVIEW: BCB To Hold Rates Until Q1 2026 - Le Grazie)

Kfoury noted that fiscal noise has recently eased and has not had as much impact on Brazilian asset prices as it did last year, while attention is now more focused on the external environment, especially the 50% trade tariff imposed by the United States.

In his view, however, the new U.S. policy should not have an inflationary effect.

“It’s more disinflationary than inflationary. Besides the hit to GDP, there could be some redirection of products that were previously exported to be sold in the domestic market instead.”