MNI INTERVIEW: BCB To Hold Rates Steady Until 1Q 2026 - Kawall

The Central Bank of Brazil left the door open for an additional rate hike in June, but it has likely ended its tightening cycle and will probably hold the Selic rate at 14.75% at least through the first quarter of 2026, former Treasury Secretary Carlos Kawall told MNI.

"The bigger discussion now is about when the board would start cutting rates, not so much whether it would deliver an additional hike in June. It's not impossible that it does, but it seems unlikely," Kawall, now a partner at investment manager Oriz, said in an interview.

He pointed out that the BCB didn’t commit to any future move and included several elements in the statement suggesting that the board wants to halt hiking. (See MNI WATCH: BCB To Halt Rate Hikes, Higher for Longer Strategy)

"First, the statement placed significant weight on global uncertainty. Second, the BCB changed the balance of risks. Previously, the balance was tilted to the upside, but now they presented a balance that — although they didn’t use the term 'balanced' — highlighted that both upside and downside risks are higher than usual, conveying a more neutral view."

MARKET REACTION

He noted that the market responded to the Monetary Policy Committee's decision last Wednesday by pricing in future rate cuts. The BCB raised the Selic rate by 50 basis points to 14.75%, offered no forward guidance for its next meeting, and stated that borrowing costs should remain restrictive for a "prolonged period."

"But the main point is: is there really room for rate cuts, as the market reacted? I believe the global disinflationary trend has little to do with our dynamics, given that our inflation problem is much more related to the imbalance between domestic supply and demand in Brazil," Kawall said.

"This is clearly connected to services inflation, a very tight labor market, and an economy that is growing above its potential output. In that sense, inflation is much less tied to exchange rates and commodities, as it often was in the past, and much more to labor market dynamics," he added.

The former official said there’s a widespread assumption that U.S. tariff policies promoted by U.S. President Donald Trump will lead to a weak dollar and falling commodity prices.

"But that’s not necessarily true. We’re seeing that some U.S. economic data don’t align with the confidence indicators. Confidence surveys have dropped much more sharply than the real economy data, which haven’t yet confirmed that downturn."

EXPANSIONARY FISCAL

Kawall noted the Brazilian government is still pursuing expansionary policies, whether on the fiscal side or through credit initiatives such as private payroll-deductible loans, which have been gaining traction since April and will likely continue to do so in the coming months, sustaining a still-robust level of activity.

"The central bank is managing the possibility of ending the tightening cycle while inflation expectations remain highly unanchored. There are still no conclusive signs of an economic slowdown, and inflation, as measured by core indicators and the services sector, continues to show an upward trend over 12 months," he said.

"In that context, the idea of a falling Selic rate, while public spending and credit policies remain expansionary, seems rather far off," he concluded.