MNI INTERVIEW: BCB Likely To Start Cuts With 50bp - Kfoury

The Central Bank of Brazil is likely to start its easing cycle at the next meeting in March with a 50-basis-point cut to 14.50%, the former head of the BCB’s department of economic research Marcelo Kfoury told MNI, adding that the board could have begun easing in January but did not want to surprise the market.

"The BCB guided the market toward to this position and then did not want to surprise it by cutting rates. So I think it could already have started the easing process," 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.

The Monetary Policy Committee (Copom) decided last week to hold its official Selic rate at 15.00% again and said it would start the easing cycle at its next meeting in March if the outlook evolves as expected, without specifying the size of the cut.

Kfoury said the outlook for inflation has improved and is currently lower than expected.

"Interest rates are too high and inflation is at fairly reasonable levels, even though it is still above the target," he said in an interview.

While the fall in inflation has come due to factors such as the appreciation of the real, rather than to any softening of domestic demand, it has surprised to the downside, he said. (See MNI BCB WATCH: Copom Set To Cut Rates In March, Gradual Start)

"The market has already been cutting aggressively in the yield curve. You can see that the one-year rate has fallen by almost 100 basis points over the past month. Given all this, I think they will start with a 50-basis-point cut in March," Kfoury said.

AMBITIOUS INFLATION TARGET

Even though Brazil’s 3% inflation may be overly ambitious, since historically that level has been reached only a few times, raising the target now would bring more noise than benefits, he went on, addressing a perennial topic for debate among Brazilian analysts.

“Brazil’s inflation has never been persistently at 3%. So analysts think it is difficult to reach this level. There is a historical factor of structurally somewhat higher inflation,” he said.

Currently, according to the BCB’s Focus survey, analysts expect inflation at 3.5% in 2028 and 2029, half a percentage point above the target.

“So if you set interest rates at 15%, you still cannot push inflation below 3%, then you can see that something is wrong. You would need interest rates of 20%. That is another clue that setting the average target at 3% may have been too ambitious.”

He forecasts the policy rate will end this year at 12.25% and, with a somewhat improved fiscal outlook, could approach 9% by the end of the cycle.

The real has strengthened recently and closed below BRL5.20 per dollar last week, but moved back to around 5.25 Monday.

“I find it hard to see a dollar below BRL5.00. It will depend a lot on the international backdrop. It seems to be one of U.S. President Donald Trump’s objectives to keep the dollar weak, which benefits the Brazilian currency, but I think the exchange rate is already close to a floor,” Kfoury said.