MNI INTERVIEW: BCB To Cut 50BP Amid Iran Uncertainty - Kawall

The Central Bank of Brazil will likely begin reducing interest rates next week with a 50-basis-point cut to 14.50%, former Treasury Secretary Carlos Kawall told MNI, adding that uncertainty around the conflict in Iran could prompt policymakers to proceed cautiously and avoid providing clear guidance on the pace of further easing.

"Our call is for an initial 50bp cut. Of course, there is a lot of uncertainty stemming from the oil conflict issue, but based on the communication so far, there is a perception that the real interest rate is high and that they would adjust the Selic rate while still keeping it in contractionary territory," Kawall, now a partner at investment manager Oriz, said in an interview.

He stressed that the decision will depend heavily on how the conflict in Iran evolves in the days leading up to the meeting. (See MNI INTERVIEW: BCB Likely To Cut 50BP Despite Conflict - Velho)

"We will have to wait until then to see what the outcome will be by next Wednesday. Normally this would be a period when the conclusion would already be clear, but in this context the uncertainty will continue until the day of the meeting."

MEETING BY MEETING DECISION

Kawall stressed that in a context of greater global uncertainty, the Monetary Policy Committee (Copom) should opt to take decisions meeting by meeting, without clear guidance on the size of the next cuts.

"By the May meeting the conflict might already have been resolved from the standpoint of oil supply, or it might not, it could even worsen. So I think it is a step-by-step process," he said.

Brazil tends to benefit when prices for global commodities such as oil rise, given that it is an exporter, he said.

"At the same time, there is pressure on commodity prices, which is inflationary, and this could be mitigated by exchange rate appreciation, which is disinflationary," he noted.

COPOM'S INFLATION FORECAST

Copom’s inflation forecast for the relevant horizon, which at this meeting is the third quarter of 2027, should remain at 3.2%, slightly above the 3% target, he said. "The stronger Brazilian real could contribute to a lower projection, but oil price pressures should offset that to the upside."

"In addition, the latest inflation data were somewhat concerning regarding core inflation and services linked to the labor market. The part related to the labor market has become a concern again. So I think the most likely outcome is that they will keep the projection unchanged," he added.

Long-term inflation expectations are at 3.5%, with half a percentage point of de-anchoring, which he attributes to the country’s fiscal disarray.

On the domestic front, October’s general elections could increase perceptions of fiscal risk if the government expands measures such as the one announced this week to eliminate taxes on diesel, he said.