Preview of the Brazilian Central Bank (BCB) in July
2024-08-02
■ Despite further pressure from the Lula government to cut interest rates on BCB, it is expected that the policy interest rate will remain unchanged in July
■ There is a clear divergence of positions regarding the expansion of fiscal spending, and the intensifying confrontation between BCB and the Lula government will create a headwind for the real exchange rate
The Brazilian Central Bank (BCB) is expected to release the results of the Committee on Monetary Policy (COPOM) on July 31st (local time). The market expects the policy interest rate to remain at 10.50% for two consecutive meetings. The financial market is concerned about when the interest rate cut cycle will resume after it stops in June. However, it is expected that even after the COPOM meeting in July, the expectation of further interest rate cuts this year will still decrease.
Since the COPOM meeting in June, there has been increased pressure from the government to lower interest rates for the BCB. Firstly, President Lula signed an order on June 26th to revise the BCB inflation target. Previously, the National Monetary Committee (CMN) set an inflation target annually by the Minister of Finance, the Minister of Planning and Budget Management, and the President of the BCB. A long-term sustainability goal will be set in the future, which is "central value: 3%, upper and lower range: 1.5 percentage points". In addition, if the inflation target range is not reached for six consecutive months, the BCB needs to submit an open letter to the Minister of Finance and propose necessary measures to restore the inflation rate to the target. This makes BCB more susceptible to government pressure. In addition, President Lula stated in a television interview on July 16th that 'if there are more important matters, the government has no obligation to set and achieve fiscal goals.' In addition, the latest forecast for this year's primary fiscal deficit (PB) was released on July 22 at 32.6 billion reais, higher than the 14.5 billion reais in May. The Lula government intends to further stimulate the economy by cutting interest rates and expanding fiscal spending.
However, BCB believes that excessive fiscal spending will increase the "noise" in the economy, so it continues to maintain a long-term suppressive monetary policy to counter the measures of the Lula government. On July 1st, BCB board member Gomes stated that "expansionary fiscal policy increases the cost of achieving inflation targets." On July 2nd, BCB President Neto pointed out that the sharp decline in the real since mid-May was due to concerns about the prospects of fiscal and monetary policies. In this context, in terms of the economy, the consumer confidence index in July was 92.9, and retail sales in May increased by 8.1% year-on-year, indicating the robustness of the Brazilian economy. Regarding inflation, June's Consumer Price Index (IPCA) increased by 4.23% year-on-year. Due to the lack of immediate implementation of interest rate cuts to support the economy, it is expected that the BCB will continue to curb inflation at the COPOM meeting in July and will not imply early interest rate cuts. Therefore, the confrontation between BCB and the Lula government will deepen, ultimately unfavorable to the real exchange rate.
■ There is a clear divergence of positions regarding the expansion of fiscal spending, and the intensifying confrontation between BCB and the Lula government will create a headwind for the real exchange rate
The Brazilian Central Bank (BCB) is expected to release the results of the Committee on Monetary Policy (COPOM) on July 31st (local time). The market expects the policy interest rate to remain at 10.50% for two consecutive meetings. The financial market is concerned about when the interest rate cut cycle will resume after it stops in June. However, it is expected that even after the COPOM meeting in July, the expectation of further interest rate cuts this year will still decrease.
Since the COPOM meeting in June, there has been increased pressure from the government to lower interest rates for the BCB. Firstly, President Lula signed an order on June 26th to revise the BCB inflation target. Previously, the National Monetary Committee (CMN) set an inflation target annually by the Minister of Finance, the Minister of Planning and Budget Management, and the President of the BCB. A long-term sustainability goal will be set in the future, which is "central value: 3%, upper and lower range: 1.5 percentage points". In addition, if the inflation target range is not reached for six consecutive months, the BCB needs to submit an open letter to the Minister of Finance and propose necessary measures to restore the inflation rate to the target. This makes BCB more susceptible to government pressure. In addition, President Lula stated in a television interview on July 16th that 'if there are more important matters, the government has no obligation to set and achieve fiscal goals.' In addition, the latest forecast for this year's primary fiscal deficit (PB) was released on July 22 at 32.6 billion reais, higher than the 14.5 billion reais in May. The Lula government intends to further stimulate the economy by cutting interest rates and expanding fiscal spending.
However, BCB believes that excessive fiscal spending will increase the "noise" in the economy, so it continues to maintain a long-term suppressive monetary policy to counter the measures of the Lula government. On July 1st, BCB board member Gomes stated that "expansionary fiscal policy increases the cost of achieving inflation targets." On July 2nd, BCB President Neto pointed out that the sharp decline in the real since mid-May was due to concerns about the prospects of fiscal and monetary policies. In this context, in terms of the economy, the consumer confidence index in July was 92.9, and retail sales in May increased by 8.1% year-on-year, indicating the robustness of the Brazilian economy. Regarding inflation, June's Consumer Price Index (IPCA) increased by 4.23% year-on-year. Due to the lack of immediate implementation of interest rate cuts to support the economy, it is expected that the BCB will continue to curb inflation at the COPOM meeting in July and will not imply early interest rate cuts. Therefore, the confrontation between BCB and the Lula government will deepen, ultimately unfavorable to the real exchange rate.