MNI INTERVIEW: BCB To Hold Until March, Fiscal Policy Key

The Central Bank of Brazil is likely to keep interest rates on hold at its next meeting before starting to cut in March, with the magnitude of the easing cycle closely linked to fiscal policy as the country heads to national elections, its former deputy governor for international affairs Tony Volpon told MNI.

"The central bank is trying to convince everyone that it is pursuing the 3% target and not the tolerance band. In reality, it is waiting until it has sufficient conditions to show an inflation projection at the target in the relevant horizon that is credible," Volpon, now co-CEO of Goindex and professor at Georgetown University, said in an interview.

"Market participants are getting anxious to see the beginning of the easing cycle, but I think it will come in March," he added. (See MNI INTERVIEW: BCB January Cut Still On The Table - Le Grazie)

The BCB held rates at 15% last month and said the strategy of maintaining policy steady for a “very prolonged period” is “appropriate,” maintaining a hawkish tone that included a renewed warning that it would not hesitate to hike again if necessary.

Volpon noted that unemployment is at an historic low, which supports a scenario in which the BCB decides to wait a bit longer before cutting rates. "If unemployment were rising, it would be another story. There could be an argument for starting cuts even with the projection still slightly above the target, but that is not the case."

The magnitude of the easing cycle will depend on the fiscal outlook and the new government which will take office after October’s general elections, Volpon said, but he added that cutting to around 12% by the end of this year, as priced by the market, would still have a significant impact on public debt.

“In the case of a potential reelection of President Lula, I’m not sure the market will sit back and watch debt grow by much without going into panic mode. At the same time, the central bank might only cut rates towards 9% if the fiscal side is helpful.”

VENEZUELA 

Regarding the situation in neighboring Venezuela, the former BCB deputy governor saw no effects in Brazil in the short term, though the longer-term geopolitical implications are unclear.

"It is not clear what the real intentions of the Trump administration are. I do not even know if they have internally decided what the game plan is," he said.

"In the long run, there is this issue of the United States once again adopting a global behavior pattern of spheres of influence and direct relations between great powers, which is something we saw a lot in the nineteenth century.”

In such a context, institutions such as the UN, IMF, World Bank, etc. would lose relevance and spheres of power would become concentrated in the two world powers, the United States and China.

"This started in the first Trump administration, but it did not change much under Biden. So I do not think it is something driven by Trump or the Republican Party and it would not change in a potential new administration."

The former deputy governor stressed that Brazil needs to start thinking about what its role will be amid these global shifts.