MNI INTERVIEW: BCB To Start Cuts In January - Figueiredo

The Central Bank of Brazil is likely to begin its easing cycle by cutting 25 basis points in January, though it could postpone to March if data is unfavorable, former BCB deputy governor for monetary policy Luiz Fernando Figueiredo told MNI.

"In my view, the BCB will likely start cutting in January. The central bank will have a very good amount of data to make a decision. If it doesn’t happen in January, the start of the rate-cutting process shouldn’t go beyond March," he said in an interview.

Figueiredo pointed to moderating economic data, suggesting that demand is cooling, which would support the case for central bank action.

"We have also seen credit calming down. In the last few months, we have seen downside surprises in current inflation, and inflation expectations settling," he said.

Price and other economic data needs to continue to moderate for the central bank to act, he said. "And I think it will."

50BP CUT NOT LIKELY

Figueiredo stressed that the Copom should begin cutting rates gradually, with 25 points, and would only cut aggressively, by 50 basis points, if it waited until March to start and felt it was behind the curve.

"Let’s see how this new central bank behaves in a rate-cutting process, whether it will start more gradually or not. My guess is they will start a bit earlier, in January, with 25 basis points," he said.

The BCB decided to hold its official Selic rate at 15.00% this month, and stressed that keeping rates at this level for a "very prolonged period" will be sufficient to contain prices pressure. (See MNI BCB WATCH: Keeping 15.00% Rate For Longer Will Be Enough)

Figueiredo said that expansionary fiscal policy will limit Copom’s room to cut as far as single digits.

"Fiscal policy is still very off track, which ultimately makes the central bank’s job much harder. Only when we have a really strong signal of an important fiscal adjustment will we see the interest rate move to single digits. Until then, I think that’s very unlikely to happen."

The former official believes that by the end of next year the Selic rate will be around 12%. "It could be a bit more or a bit less, but roughly around that level," he stressed.

Only after a determined fiscal adjustment will the central bank be able to fully anchor long-term expectations, he said. Currently, analysts project long-term inflation at 3.5%, above the 3% target.

Figueiredo emphasized that the stronger real, which has been helping the central bank in the disinflation process, is mostly due to a weaker dollar globally, and that a possible fiscal adjustment could give a boost to the exchange rate.