MNI INTERVIEW: BCB To Hold Rates Until Q1 2026 - Le Grazie

The Central Bank of Brazil is likely to hold its interest rate until at least the first quarter of 2026, before beginning an easing cycle, possibly at its April meeting, former Deputy Governor for Monetary Policy Reinaldo Le Grazie told MNI.

"Possibly the Copom will keep the Selic at 15% until April next year. But I have a concern on the fiscal side, which in an election year tends to be more expansionary. That could create some discomfort within the committee about beginning to cut," he said in an interview, noting that the government is preparing a package to counter U.S. tariffs, with talk of BRL30 billion in public spending.

Activity, which had been showing incipient signs of moderation, is now showing more pronounced signs of weakness, he said.

The BCB last month decided to hold its official Selic rate at 15.00%, saying that the "interruption of the rate-hiking cycle" will continue in further meetings to allow it time to "examine its yet-to-be-seen cumulative impacts."

Le Grazie, now a partner at fund manager Panamby Capital, forecasts that inflation next year will be similar to that of 2025, at around 5%. “I find it hard to see what will bring inflation down next year.”

He also stressed the risk of overkill, since a 15% interest rate with 5% inflation is highly restrictive. (See MNI WATCH: BCB Holding For Now, Curbing Early Easing Bets)

50% TARIFF NOT INFLATIONARY

In his view, the 50% trade tariff imposed on Brazil by the United States is unlikely to be inflationary and will likely hit activity hard.

"For now, the exchange rate is stable, so I don't see any inflationary pressure coming from the tariffs,” he said. "In my scenario, the dollar remains weaker going forward, and that's good for the real.”

The former deputy governor said the bar is very high for the BCB to raise rates again.

"I think that would happen if the fiscal situation deteriorated sharply next year and expectations worsened again, for example. To bring inflation to target in 2027, you would have to deliver another rate shock and push it to 20%. That's not viable and would not be good monetary policy because it would put activity at great risk."

Nonetheless, higher rates are not impossible, he added.

"They are still leaving the door open to hike again if necessary. In my view, they are in a pause stage with a very high bar to hike, even though they chose to speak of an interruption of the cycle."

The BCB’s use of the word “interruption” rather than “pause” implies that the next move is likely to be a cut, according to Le Grazie. "They are trying to build that flexibility to hike again if needed, so it would be more accurate to call it a pause."