MNI INTERVIEW: Lack Of BCB Guidance Doesn't Mean End Of Cycle

The lack of guidance from the Central Bank of Brazil for June does not necessarily signal the end of the tightening cycle, former secretary of industry and commerce development at the Ministry of Economy Caio Megale told MNI, adding that the board could hike 25 basis points to 15% at the next meeting.

"The Copom statement conveyed a tone of caution that was already expected. The absence of clear guidance for June does not necessarily signal the end of the hiking cycle. In our view, it rather reflects the 'flexibility' the committee has been emphasizing in the face of heightened uncertainty," said Megale, now chief economist at XP, in an interview.

For the next meeting, he projects the possibility of one last 25-basis-point adjustment. "Economic activity data to be released by then will likely point to a still-resilient economy. That, combined with persistent inflationary pressures and unanchored expectations, could convince Copom to deliver a final cut to the Selic rate," he explained.

BCB decided to increase its official Selic rate by 50 basis points last week to 14.75%, offering no forward guidance for the next meetings, and stated that borrowing costs should remain restrictive for a "prolonged period."

NO ROOM FOR 2025 CUTS

The BCB’s Monetary Policy Committee, known as Copom, seems to be signaling that, regardless of whether it delivers one more hike in June or not, it intends to keep interest rates at a restrictive level for some time, the former official stressed, adding that he sees no room for rate cuts in 2025. (See MNI INTERVIEW: BCB To Hold Rates Steady Until 1Q 2026 - Kawall)

"The challenging inflation outlook and the resilience of economic activity suggest that the Selic rate will remain at a high level at least until mid-2026," he predicted.

His current scenario projects the Selic rate at 15% by the end of this year, with easing beginning only in 2026 — when Copom will be targeting 2027 inflation — and reaching 12.5% by the end of that year.

"It’s worth noting that bringing inflation back to target remains a significant challenge, with our projection for 2026 still at 4.7%, above the upper limit of the target range."

Minutes from the last meeting released Tuesday showed the balance of risks is "less asymmetric," but there is no consensus around its being neutral, he said. "In our view, Copom remains more concerned about inflationary risks than risks to activity."

TRUMP'S TARIFFS

“Liberation Day” and U.S. President Donald Trump’s tariffs have brought a significant increase in global uncertainty, he noted.

"On the one hand, a weaker dollar helps contain inflationary pressures in Brazil, which is positive. On the other hand, lower commodity prices, especially oil, negatively affect our trade balance and fiscal revenues, making it harder to meet the primary surplus target.

"Brazil has been seen as a 'relative winner' in this trade war because our economy is not heavily reliant on foreign trade, exports account for just 12% of GDP. Also, we are a strong candidate to replace the U.S. as a grain supplier to China. We are already seeing an increase in soybean exports to China, and this trend is expected to intensify," he added.

In addition, he said the market interpreted Trump’s recent statements on China more as a negotiating tactic than a definitive break.

"If the United States and China reach an understanding, we could see a reduction in global trade tensions, which would benefit the global economy as a whole. That helps explain the recent positive market reaction."

For Brazil, this could be an interesting opportunity, he said. "Not only could we expand our exports to China, but we could also use this moment to rethink our own tariff policy, which remains one of the highest among emerging markets," he concluded.