MNI WATCH: BCB Holding For Now, Curbing Early Easing Bets

The Central Bank of Brazil said Wednesday it will maintain its official Selic rate at 15.00% for a "very prolonged period," reiterating an "interruption" that points to the end to the tightening cycle but also attempts to push back on any premature expectations for cuts. 

"If the expected scenario materializes, the Committee foresees a continuation of the interruption of the rate-hiking cycle to examine its yet-to-be-seen cumulative impacts," the statement stressed.

The board also emphasized that it wants to evaluate whether the current interest rate level, "assuming it remains stable for a very prolonged period," will be sufficient to ensure the convergence of inflation to the target.

While the monetary policy committee (Copom) stated that it "will not hesitate to resume the rate-hiking cycle if appropriate," the use of the word "interruption" instead of "pause" suggests an end to the cycle, implying that, after holding rates steady for a while, the most likely next move would be a cut rather than a hike.

HIKE INTERRUPTION

Despite the BCB’s guidance that it intends to hold rates for an extended period, the market has started to price in the beginning of an easing cycle, mostly for the first quarter of 2026, though some expect it as early as the end of this year. In this context, Copom is trying to curb the premature pricing in rate cuts by keeping a potential hike on the table, though it remains highly unlikely.

Copom’s inflation forecast for the first quarter of 2027 — now considered the relevant horizon for monetary policy — is at 3.6%, still above the 3% target but within the 1.5 percentage point tolerance range, and more optimistic than market expectations, which stand at 4.00% for next year.

The decision came amid increasing uncertainty around U.S. trade policy with the imposition of a 50% tariff, with some exceptions, starting August 6. (See MNI INTERVIEW: Brazil Must Keep Negotiating On Tariffs -Barral)

"The Committee has been closely monitoring the announcements on tariffs by the USA to Brazil, which reinforces its cautious stance in a scenario of heightened uncertainty," the statement said.

Copom ended its tightening cycle after seven consecutive increases, bringing the rate to its highest level since 2006. The decision was in line with market expectations.

Regarding the domestic outlook, the board saw economic activity moderation as expected, but the labor market still "showing strength".