MNI INTERVIEW: BCB Likely To Cut 50bps In March - Megale

The Central Bank of Brazil is likely to cut the Selic rate by 50 basis points to 14.50% at its next meeting due to an improvement in the inflation outlook, former secretary of industry and commerce development at the Economy Ministry Caio Megale told MNI, but he added that the BCB’s approach to any easing cycle would be cautious.

"Based on the signals in both the statement and the minutes, the most likely scenario is a 50bp cut in March," Megale, who was also director of programs at the Economy Ministry from 2019 to 2020 and is now chief economist at XP Investments, said in an interview.

There has been an improvement in the inflation outlook, and the assessment of the Monetary Policy Committee (Copom) is that the monetary policy transmission mechanism is working, he noted.

"That said, as expectations remain above target and activity is still strong, the cycle is likely to be cautious.”

The BCB decided this month to hold its official Selic rate at 15.00% once more and said it would start the easing cycle at its next meeting in March if the outlook evolved as expected, without specifying the size of the cut.

Some analysts have said that Copom already had the conditions to cut in January, but Megale disagreed. (See MNI INTERVIEW: BCB Likely To Start Cuts With 50bp - Kfoury)

"I understand that the decision to wait was consistent with the central bank’s strategy. Despite the recent improvement in inflation, Copom itself stresses that expectations are still above target and that the labor market remains resilient," he said.

"In an environment like this, starting the cycle only when there is greater conviction about the inflation trajectory seems a prudent choice.”

CAUTIOUS EASING CYCLE

In the minutes, Copom said that the magnitude and duration of the cycle will be defined over time and noted mixed signals regarding the slowdown in activity. The former official believes that this refers more to the total size of the cycle to be implemented than to the pace.

"The board acknowledges mixed signals on activity, but also highlights moderating growth and an improving inflation backdrop. Considering that 15% is a very high rate, a 50bp cut still seems to us a cautious pace," Megale highlighted.

Monetary policy is working well, he said.

"There are signs of a slowdown in activity, especially in credit-related segments. In addition, the exchange rate has appreciated, which represents another channel of monetary policy transmission."

Fiscal policy has been expansionary, and will be even more so this year, which partially offsets the effect of monetary policy, he added.

Megale’s baseline scenario points to a Selic rate of around 12.50% at the end of the year, after about five consecutive 50bp cuts.

"Even at that level, the real rate would remain close to 8%, that is, still in contractionary territory,” he said.

This reflects not only the need to consolidate the disinflation process, but also the fiscal challenges ahead, according to Megale.

 "For additional Selic rate cuts, we believe structural advances will be needed to reduce the fiscal impulse and put public debt on a sustainable path in the coming years.”