MNI INTERVIEW: BCB Likely To Start Cuts In December - Werlang

The Central Bank of Brazil is likely to hold its interest rate at 15% until December, when the board is expected to begin the easing cycle with a 25-basis-point cut, former deputy governor for economic policy Sergio Werlang told MNI, noting that economic activity is already slowing due to monetary policy tightening.

"My main guess is that the Copom will cut 25bps in December. If the economy continues to cool at a reasonable pace, pointing to growth of around 1% over the next 12 months, I would say the initial cut might even need to be larger. But that depends on what happens with economic activity, and it’s too early to know that now," Werlang, now a professor at Fundacao Getulio Vargas, said in an interview.

The next steps in monetary policy are also tied to current inflation developments, he said. "Even if expectations converge, I think the decline will only come if it actually shows up in short-term inflation."

The BCB last month held its official Selic rate, saying that the "interruption of the rate-hiking cycle" would continue in upcoming meetings to allow time to "examine its yet-to-be-seen cumulative impacts." (See MNI INTERVIEW: BCB Hold Until 2026, Early Cut Possible -Kfoury)

MID-AUGUST DIP

The former deputy governor emphasized that while the mid-August inflation data fell 0.14%, the first decline in two years, but that the composition wasn’t good. "It is a bad number. There was greater pressure from services than expected."

"Economic activity is slowing, there’s no doubt about it. It seems to me that this is already the effect of monetary policy," he said. The effect on inflation will come later, he added, "although we are already seeing an impact on prices due to the depreciation of the dollar."

3% INFLATION TARGET TOO LOW

He stressed that the 3% inflation target is too low for Brazil’s structural standards, but that any increase in the objective should only be made alongside a strong fiscal adjustment.

"I think some policy easing has to happen, because the real interest rate is at a completely absurd level. The short-term rate is close to 10%, and the long-term rate is between 7% and 7.5%. It could come down through spending cuts, which would be the healthy way. And then, if that were sustainable, there should be an increase in the inflation target to more viable levels for Brazil, such as 4% or 4.5%."

According to him, the terminal rate will depend on the fiscal outcome and external developments.

He highlighted that the U.S. president Donald Trump attempt to interfere with the Fed, by trying to dismiss governor Lisa Cook, would likely only impact Brazil through the exchange rate.