MNI INTERVIEW: Brazil's Hiking Cycle Nearing End - Figueiredo

The Central Bank of Brazil is likely to hike its interest rate by 50 basis points to 14.75% next week and might leave options open for further decisions amid increasing uncertainty surrounding U.S. trade policy, former BCB deputy for monetary policy Luiz Fernando Figueiredo told MNI.

The tightening cycle appears to be nearing its end, Figueiredo, now an executive at the Fefig Institute, said in an interview.

"The BCB will probably hike by 50 basis points at the next meeting and leave the guidance a bit open for the following ones. We don’t know what’s going to happen in the external environment, there are moments when you need to stay calm to assess the next steps," he said.

In this case being cautious means continuing to hike, "but not too much,” he said.

"Some things have improved since the last meeting. Currencies around the world have strengthened against the dollar. In addition, inflation expectations have stopped worsening amid uncertainties about economic activity."

"That’s why it makes sense for the central bank to raise by a normal step, which is 50 basis points. And then, for the next meeting, we’ll see what happens," he added.

The BCB raised interest rates by 100 basis points in March, to 14.25%, and signaled a smaller hike in May.

BEYOND MAY

Beyond May, Figueiredo believes the most likely scenario is that the Monetary Policy Committee (Copom) will go for one more smaller hike of 25 basis points and then stop the cycle. "But there’s still a lot of uncertainty around that.”

The board has been talking about early signs of economic slowdown and whether the level of monetary tightening will be sufficient to bring inflation down to the 3% target. The former deputy said it is still not possible to tell if it will be enough, but the economy is indeed showing signs of cooling.

"We still can’t measure the intensity [of the slowdown]. So it’s not possible to know whether it will be enough or not, based on the data we have today. But it seems we’re not too far from the end of the hiking cycle,” he said.

With the end of the tightening cycle approaching, the market is already starting to price in the beginning of rate cuts, but these will depend more on the external scenario than on domestic factors, according to Figueiredo.

"If U.S. President Donald Trump acts more rationally, and that seems to be the case, it’s possible the central bank could start cutting a bit earlier than expected. But it’s still very hard to say when." (See MNI INTERVIEW: BCB Might Cut Sooner as Activity Slows - Serra)

"The uncertainty coming from abroad has become very significant. But the fiscal issue is still relevant and will continue to be. The government might ease up a bit on its expansionary stance because of this uncertainty. If that happens, it would be a good thing," he concluded.