MNI INTERVIEW: BCB January Rate Cut Likely, Can Delay - Kawall

The Central Bank of Brazil will likely begin cutting interest rates in January, former Treasury Secretary Carlos Kawall told MNI, though he added that the start of the easing cycle could be delayed if inflation does not ease further.

"Both the statement and the minutes from the last meeting ended up being marginally more hawkish than expected," Kawall, now a partner at investment manager Oriz, said in an interview.

"Copom even kept the warning that they might have to raise the Selic rate if necessary, which now seems unlikely. They wanted to maintain this tougher language to avoid any speculation that they might be leaning toward cutting rates earlier," he added.

The BCB’s Monetary Policy Committee (Copom) kept the Selic rate at 15% last month and said monetary policy should remain significantly contractionary for a prolonged period. (See MNI INTERVIEW - BCB To Hold Rates Until Q1 2026 - Schwartsman)

Progress so far on inflation has been consistent but modest, Kawall noted.

"The BCB will continue with this tough communication at least until the end of the year,” he said. "I believe Copom will start cutting rates in January, though it might have to delay that a bit further. There was a moment, just over a month ago, when I thought the bias was toward Copom cutting rates earlier, but now it seems to me the bias is toward acting later.”

He emphasized that while inflation has improved for food and other exchange rate-sensitive items, services — which are more responsive to monetary policy — remain resilient.

FISCAL POLICY

With monetary policy restrictive, Kawall said the government is now assessing whether it needs more stimulus tools at hand in case an adverse economic scenario takes shape next year, during the presidential election campaign.

"High real interest rates have coexisted with an economy that’s performing well, with an overheated labor market driven by fiscal policy. This balance of very high real interest rates and a large deficit, which is not unique to Brazil, is unlikely to shift during an election year."

He noted that markets are becoming more sensitive to fiscal risk again after concerns remained subdued for much of the year.

"New fiscal developments suggest that the government’s post-election agenda is not strongly committed to fiscal adjustment. I think that’s what has reintroduced this uncertainty,” Kawall said.

U.S. TRADE POLICY

The former secretary does not see much impact from the 50% tariffs imposed on Brazil by U.S. President Donald Trump.

"Neither side was significantly affected by the issue. For neither the U.S. nor Brazil are bilateral exports really relevant."

It was both in the U.S. government’s interest to make an example of Brazil and in the Brazilian government’s interest to assert autonomy and sovereignty, he noted.

"Obviously, that’s totally different when you’re talking about the U.S.–China or U.S.–Europe relationships. Those are extremely important and delicate economic relationships, and that’s precisely why no one resorts to fights or bravado. It’s a more serious, difficult, and complex negotiation."