MNI INTERVIEW: BCB To Hold Until 2026 To Preserve Credibility

The Central Bank of Brazil has shifted to a more cautious stance to preserve its credibility, and a rate cut in 2025 now appears unlikely, former head of open market operations Sergio Goldenstein told MNI, adding that the easing cycle will likely begin in January but could be postponed until March.

“Since the split five-four decision in May last year, which had a bad reaction from the market, the Central Bank has made it a key priority to rebuild credibility and, with that, achieve at least a partial re-anchoring of inflation expectations,” Goldenstein, now founding partner of Eytse Estrategia, said in an interview.

According to him, the Central Bank is less concerned with the timing of the beginning of the easing cycle and much more focused on ensuring a consistent monetary policy process.

“To maintain consistency and avoid losing credibility, the board has adopted a conservative stance, which I believe is the right approach.”

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

2025 CUT UNLIKELY

Until recently, some analysts expected the BCB to start reducing the Selic rate in 2025, but that now seems highly unlikely, he noted.

“There is currently a split between those expecting the first cut in January and those in March. I believe it will happen in January, but I also recognize the possibility of the process beginning in March,” the former BCB server stressed.

“There is a risk of exchange rate depreciation, though I’m optimistic on that front, as well as stronger-than-expected economic activity, which could prompt the central bank to postpone the first cut to March,” he added.

Goldenstein mentioned several factors that continue to create discomfort for the Central Bank. (See MNI INTERVIEW: BCB January Rate Cut Likely, Can Delay - Kawall)

“The first point is that, despite the improvement in expectations, de-anchoring remains significant. Projections for 2026 and 2027 still show a notable deviation from the inflation target. This results in Copom’s inflation projection remaining above target, at 3.4% over the relevant horizon.”

For the Central Bank to begin cutting rates, it is important that its inflation forecast moves closer to the target, he said.

“The third source of discomfort is the resilience of the labor market. We are seeing unemployment at a historic low of 5.6%, and this labor market strength has also been contributing to the persistence of services inflation,” Goldenstein said.

FISCAL RISKS

In his view, both fiscal and quasi-fiscal policies have been moving in the opposite direction to monetary policy.

“This risk has been increasing because the government has adopted quasi-fiscal measures, including subsidized credit programs, which end up reducing the effectiveness of monetary policy,” he said.

The BCB’s terminal rate will depend on the country’s fiscal situation and the outcome of the 2026 presidential elections, according to Goldenstein.

“If the opposition wins, the Selic could fall back to single digits and the exchange rate would likely appreciate significantly,” he said, adding that if the current government is re-elected, the real could weaken and there would be limited room for the policy rate to continue falling.