MNI INTERVIEW: BCB To Hold Rates At 15%, Cut In March -Kanczuk

The Central Bank of Brazil is likely to hold its Selic rate at 15.00% Wednesday, former BCB Deputy Governor for Economic Policy Fabio Kanczuk told MNI, adding that the board might start cutting borrowing costs in March in line with current market pricing.

"I think a cut in January is very unlikely and would be very surprising. It is possible they signal a cut in March, but I think they will not, because they are comfortable with market pricing, which points to the start of the easing cycle in March," said Kanczuk, now head of macroeconomics at ASA Financial Institution, in an interview.

He noted that market participants had previously priced a January cut but shifted to March possibly due to political developments that pushed up bond yields, with the choice of Flavio Bolsonaro as the right-wing candidate instead of Tarcísio de Freitas as previously signaled.

"We also changed. At first we thought it was January. Later, that it could be in March but with 50bps. Now we think it will be in March but with 25bps." (See MNI INTERVIEW: BCB To Hold Until March, Fiscal Policy Key)

FOLLOWING THE CURVE

Kanczuk said the central bank has gradually unlinked its communication from determinants such as the de-anchoring of inflation expectations and a dynamic labor market, thus being ready to cut but still tending to follow the yield curve.

"I do not believe the central bank will do something different from what is in the curve. BCB prepared everything to cut. But the curve did not price a cut, so it does not cut."

The BCB held rates at 15% last month and said the strategy of maintaining policy steady for a “very prolonged period” is “appropriate,” maintaining a hawkish tone that included a renewed warning that it would not hesitate to hike again if necessary.

"What we suspect happened with the yield curve was the political change. Instead of the market believing Tarcisio would be the right-wing candidate, it now thinks he will not. And we think that is the most reasonable explanation for what happened, not international or geopolitical crises like Venezuela or Greenland," the former deputy governor said.

Tarcisio de Freitas had been seen as more likely to defeat President Luiz Inacio Lula da Silva in the upcoming presidential elections than Flavio Bolsonaro, lowering chances of future fiscal reforms.

Kanczuk stressed the interest rate might reach 12.5% by the end of this year, and that further cuts would depend on the fiscal policy of the new government in 2027.

Although inflation expectations have improved in the short term, over the long term they remain de-anchored at 3.5%, above the 3% target.

"I think they also unlinked themselves from anchoring in their official communication. They placed very little emphasis on it. I agree that expectations are de-anchored, but I do not see that as an impediment for them to cut," he said.