MNI INTERVIEW: BCB To Hold Rates At 15% Until Next Year- Velho

The Central Bank of Brazil is likely to hold its official Selic rate at 15.00% at least until the first quarter of the next year, though the board could bring forward rate cuts if the outlook improves, former economic advisor to the Ministry of Planning and Budget Eduardo Velho told MNI.

“The BCB’s projection [for inflation] is currently at 3.6%, which I think is very hard to reach, but if that holds alongside the appreciation of the real, rate cuts could even be brought forward to the last meeting of the year, or even the one before that,” Velho, now chief economist at Equador Investimentos, said in an interview.

“It’s quite possible that by early next year this tightening will have already been transmitted to the economy,” he added. “But I believe the output gap is more positive than the central bank had previously estimated.”

Velho said that the minutes of the BCB’s latest meeting, published on Thursday, confirmed the strategy is to keep rates on hold for some time. (See MNI WATCH: BCB Likely Done Hiking Barring Inflation Surprise)

The BCB raised its interest rate by 25 basis points last week to 15.00% and signaled that, if the expected scenario materializes, "the Committee foresees an interruption of the rate-hiking cycle to examine its yet-to-be-seen cumulative impacts."

TIGHTENING IMPACTS

“The committee is counting on slower growth, the lag in the transmission of interest rates to the economy, and also the lag in the effect of the currency depreciation on inflation. They mentioned that there are early signs of a slowdown in some areas of the labor market, but still very moderate. However, there’s always that warning about fiscal policy,” he said.

The recent appreciation of the Brazilian real is driven more by the depreciation of the dollar than by domestic factors, according to Velho.

He noted that monetary policy committee Copom placed heavy emphasis on unanchored inflation expectations, which remain above the 3% target even over longer horizons, and made it clear that it intends to keep rates at contractionary levels until expectations come down.

The economist also highlighted that the BCB will closely monitor moves by the Federal Reserve over the course of this year, which remain uncertain.

He recalled that the board will have to issue a formal letter explaining why inflation has remained above target for six consecutive months after the release of June’s inflation data, due in early July. In that document, the BCB is expected to outline its plan to bring inflation back to target and specify how long that will take.