MNI WATCH: BCB Likely Done Hiking Barring Inflation Surprise

The Central Bank of Brazil signaled Wednesday’s its latest 25-basis-point interest hike to 15.00% likely marks the end of the tightening cycle barring an unforeseen worsening of inflation. 

"If the expected scenario materializes, the Committee foresees an interruption of the rate hiking cycle to examine its yet-to-be-seen cumulative impacts, and then evaluate whether the current interest rate level, assuming it stable for a very prolonged period, will be enough to ensure the convergence of inflation to the target," the statement said.

At the same time, the board did not completely shut the door to additional increases if needed. 

"The Committee emphasizes that it will remain vigilant, that future monetary policy steps can be adjusted and that it will not hesitate to proceed with the rate hiking cycle if appropriate," it added. (See MNI INTERVIEW: Lack Of BCB Guidance Doesn't Mean End Of Cycle)  

NO CUTS THIS YEAR

That language is likely to curb bets on cuts this year, as the BCB stressed that ensuring the convergence of inflation to the target in an environment with unanchored expectations requires a "significantly contractionary monetary policy for a very prolonged period."

Market participants were divided over this week’s decision, with a narrow majority expecting the board to hold the official Selic rate at 14.75%, while some anticipated a 25-basis-point hike to 15%.

Copom’s inflation forecast for the end of 2026 — now considered the relevant horizon for monetary policy — remained 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 4.5% for next year.

The decision came after fiscal noise created by recent Tax on Financial Transactions (IOF) measures, which were poorly received by both the market and Congress, prompting the government to roll back some of the proposed rates.

MONITORING FISCAL IMPACTS

"The Committee continues to monitor closely how the developments on the fiscal side impact monetary policy and financial assets. The current scenario continues to be marked by deanchored inflation expectations, high inflation projections, resilience on economic activity and labor market pressures," the statement said. (See MNI INTERVIEW: Brazil Budget Positive Despite Noise-IFI Head) 

The BCB stated that economic activity and the labor market are still showing some strength, even as signs of moderating growth begin to emerge. "In recent releases, headline inflation and measures of underlying inflation remained above the inflation target."

The board also highlighted that the global environment remains adverse and particularly uncertain, mainly due to economic policy and growth outlook concerns in the United States, especially regarding trade and fiscal policies and their potential effects, as well as escalating geopolitical tensions.