MNI INTERVIEW - BCB To Hold Rates Until Q1 2026 - Schwartsman

The Central Bank of Brazil is likely to hold its interest rate at 15.00% at least until the first quarter of 2026, when the board's inflation forecasts may start to show convergence toward the 3% target, former deputy governor for international affairs Alexandre Schwartsman told MNI.

"We expect the central bank to start cutting rates sometime next year, likely in one of the first two meetings, when the inflation projections in the relevant horizon begin to point to inflation closer to the target,” Schwartsman, who now runs an economic consultancy, said in an interview.

Although he believes the BCB’s projection will reach 3% over the relevant horizon, which is currently set for the first quarter of 2027, he expects inflation to remain above the target for a long time, around 4%.

“Expectations will probably still be somewhat above the target. But the central bank actually uses those expectations as an input for its model, and the model itself should point to inflation close to the target,” he said.

"The central bank’s past behavior suggests it has never tried to bring inflation to the center of the target, even when Roberto [Campos Neto] was governor.”

Still, he argues that the target should be kept at 3%. “If a higher target is set, what happens is that expectations end up drifting even further away.”

The BCB’s Monetary Policy Committee (Copom) kept the Selic rate at 15% last month and said monetary policy should remain significantly contractionary for a prolonged period. (See MNI BCB WATCH: Copom Reiterates Higher For Longer Strategy)

HIGHER NEUTRAL RATE

The BCB’s scenarios underestimate the output gap and the neutral rate, according to Schwartsman. While the central bank projects a real neutral rate of 5%, the former deputy governor says it is likely to be around 7%.

“Tightness in the labor market has to be a concern, because it has a very close relationship with the output gap. So, if the labor market doesn’t moderate, the gap remains pressured, and a pressured gap makes it harder for inflation to converge.”

Brazil will likely face a higher neutral rate as long as the country risk premium remains elevated, especially given the unfavorable fiscal outlook, he said. “Without a proper fiscal adjustment, what we end up with is a much higher neutral interest rate. We need to find some way to eliminate the risks associated with the government’s growing debt.”

At the end of this year, the terms of two board members — Diogo Guillen (economic policy) and Renato Gomes (financial system organization) — will end, and two new members will be appointed by President Luiz Inacio Lula da Silva.

“We’ll find out who the replacements will be, whether it will be someone with the same line of thinking or if there will be a very radical change in the monetary policy orientation, but I don’t think so,” Schwartsman said.

Regarding the external environment, he noted that U.S. President Donald Trump’s new tariff policy is unlikely to affect Brazil much, sapping GDP by around 0.2% of GDP but not by enough to have a deflationary effect.

“If we move toward a stage of derailment in the U.S. economy, then the situation could become more delicate, but for now I think the effect on inflation here is negligible.”