MNI INTERVIEW: BCB January Cut Still On The Table - Le Grazie

The Central Bank of Brazil could still cut interest rates by a quarter percentage point at its January meeting despite a more hawkish-than-expected policy statement this week, because economic conditions and central bank's own forecasts are consistent with lower borrowing costs, former deputy governor for monetary policy Reinaldo Le Grazie told MNI.

He noted that the 3.2% BCB’s projection for inflation in the relevant horizon, now set for the second quarter of 2027, is very close to the target, and 0.2 percentage points is within the margin of error.

“This projection, in my view, leaves room to start cutting in January, but a bit more data-dependent,” said Le Grazie, now a partner at fund manager Panamby Capital, in an interview. "The Copom changed its language when referring to the labor market, saying it is resilient. In previous communications it said it was dynamic, which I see as a softening in tone. This, together with the 3.2% projection, creates conditions for a reduction in January." (See MNI BCB WATCH: Copom Sticks With Hawkish Tone, No Cut Hints) 

The BCB held rates at 15% this week and said the strategy of maintaining policy steady for a “very prolonged period” is “appropriate,” maintaining a hawkish tone that included a renewed warning that it would not hesitate to hike again if necessary.

Keeping the sentence saying that the Copom will not hesitate to raise rates if needed, in Le Grazie’s view, is not very meaningful and simply leaves room for the board to act if the outlook worsens, but it is not central. Policymakers were also trying to keep their options open in case they don't want to cut in January.

12% SELIC FOR 2026

For the end of 2026, he expects the Selic rate to be at 12%. For the long term, it will be necessary to wait for the election results and see what the new government’s economic policy will look like, especially on the fiscal front, he said. 

This week, the IPCA inflation figure was released, coming in at 4.46% and returning to the tolerance band around the 3% target, which allows for a variation of 1.5 percentage points above or below. Le Grazie described the result as “positive.”

Inflation expectations fell across all projected horizons, including 2025. According to the BCB’s Focus market survey, inflation is expected to end the year at 4.40%, down from 4.55% four weeks earlier. For 2026, analysts now project 4.16% (from 4.20%), 3.80% for 2027, and 3.50% for 2028.

Regarding the exchange rate, the former official expects the dollar to remain weak, favoring the real. “There won’t be upward pressure on the exchange rate coming from the international environment. Domestically, it will be closely tied to the electoral dynamics, which will be intense.”

The Brazilian real has strengthened significantly this year, rising from around BRL 6 in December 2024 to trade at BRL 5.38 on Friday. The currency’s strength has been driven by a weaker dollar globally and the Brazil’s high interest rates, making it attractive to investors.