MNI WATCH: BCB To Halt Rate Hikes, Higher for Longer Strategy

The Central Bank of Brazil gave strong evidence that the monetary tightening cycle has come to an end with Wednesday’s 50 basis-point hike to 14.75%, as it provided no forward guidance for June and included in the statement that interest rates should remain significantly contractionary “for a prolonged period.”

"For the next meeting, the scenario of heightened uncertainty, combined with the advanced stage of the current monetary policy cycle and its cumulative impacts yet to be observed, requires additional caution in the monetary policy action and flexibility to incorporate data that impact the inflation outlook," the statement said.

This is likely to curb bets on a residual hike in June and shift the market discussion toward when rate cuts might begin. (See MNI WATCH: Brazil's Copom To Hike 50BP, Cycle Nearing Its End)

The board mentioned the external environment, in particular U.S. trade policy, and domestic fiscal policy as influencing the behavior of asset prices and expectations.

PROLONGED PERIOD

"The current scenario continues to be marked by deanchored inflation expectations, high inflation projections, resilience on economic activity and labor market pressures. This scenario prescribes a significantly contractionary monetary policy for a prolonged period to assure the convergence of inflation to the target," officials added.

At its previous meeting, the Monetary Policy Committee (Copom) said the then-current outlook called for "a more contractionary monetary policy," hinting at further hikes, but it has now adopted a "higher-for-longer" strategy.

The board also changed the balance of risks, which had been tilted to the upside until the last decision and now appears to be symmetric. "The risks to its inflation scenarios, both to the upside and to the downside, are higher than usual," the document highlighted.

COPOM'S INFLATION FORECAST

On the hawkish side, Copom’s inflation forecast for the end of 2026 — now considered the relevant horizon for monetary policy — is set at 3.6%, still above the 3% target, though within the 1.5 percentage point tolerance range. While this projection could justify further hikes, it may instead support the decision to hold off on rate cuts this year.

"The Committee will remain vigilant and the calibration of the appropriate tightening of the monetary policy will continue to be guided by the objective of bringing inflation back to the target in the relevant horizon," the statement stressed.

"This calibration will depend on the inflation dynamics, especially the components that are more sensitive to monetary policy and economic activity, on the inflation projections, on the inflation expectations, on the output gap, and on the balance of risks," it added.