Review by the Central Bank of Brazil (BCB) in June
2024-06-21
■ The BCB's strategic decision to suspend the easing cycle, in line with market expectations, has been a consistent trend since the COPOM in May, providing a clear direction for the financial market.
■ BCB shows consistency internally but may deepen its opposition with the Lula government.
The Central Bank of Brazil (BCB) announced the results of the Monetary Policy Committee (COPOM) on June 19th. Since August last year, BCB has lowered policy interest rates for seven consecutive meetings. This decision to maintain policy interest rates unchanged is consistent with market expectations.
Since the COPOM meeting in May, BCB has indicated a suspension of the easing cycle. In the meeting minutes released on May 14th, concerns were expressed about the possibility of an increase in expected inflation rates. At the COPOM meeting in May, there were significant differences in the voting results regarding the magnitude of the rate cut, with four members supporting a 50-basis point rate cut and five members (including the President of BCB) supporting a 25-basis point rate cut. The former's supporters are members appointed by the Lula government, while former President Bolsonaro appoints the latter's supporters. This has sparked political disagreements. However, meeting minutes show that the former's proposal is based on established policy guidelines and strengthens the market's view that BCB will curb inflation. In addition, on June 7th and 10th, the President of BCB expressed vigilance against the high expected inflation rate in the financial market and the short-term increase in neutral interest rates. Subsequently, the May Consumer Price Index (IPCA) released on June 11th showed an increase compared to the same period last month and last year, strengthening the market's expectation that BCB will suspend its easing cycle.
In the latest statement, three main changes can be seen: (1) a unanimous policy decision, (2) an increase in expected inflation rates, and (3) proposing alternative solutions to keep policy interest rates unchanged. (1) BCB is consistent in suppressing inflation. (2) Perhaps related to (1), under the benchmark scenario, the expected inflation rate will increase from 3.8% year-on-year in 2024 to 4.0% and from 3.3% to 3.4% in 2025. In addition, the proposal of (3) implies that BCB will not adjust policy interest rates temporarily. However, the two-way risk assessment of the benchmark scenario and the assessment of the impact of fiscal policy on monetary policy have not changed significantly from last time. In this context, the expectation of interest rate cuts in the short-term financial market has been eliminated.
In the future, attention will be paid to the confrontation between the Lula government and the BCB. Although it is foreseeable that the BCB will suspend its easing cycle, President Lula explicitly criticized the BCB CEO on June 18th. The opposition between the Lula government's demand for increased fiscal spending and interest rate cuts, while the BCB's demand for a suspension of the easing cycle and a reduction in budgetary spending, may deepen, which is seen as a disadvantageous factor in the Brazilian financial market.
■ BCB shows consistency internally but may deepen its opposition with the Lula government.
The Central Bank of Brazil (BCB) announced the results of the Monetary Policy Committee (COPOM) on June 19th. Since August last year, BCB has lowered policy interest rates for seven consecutive meetings. This decision to maintain policy interest rates unchanged is consistent with market expectations.
Since the COPOM meeting in May, BCB has indicated a suspension of the easing cycle. In the meeting minutes released on May 14th, concerns were expressed about the possibility of an increase in expected inflation rates. At the COPOM meeting in May, there were significant differences in the voting results regarding the magnitude of the rate cut, with four members supporting a 50-basis point rate cut and five members (including the President of BCB) supporting a 25-basis point rate cut. The former's supporters are members appointed by the Lula government, while former President Bolsonaro appoints the latter's supporters. This has sparked political disagreements. However, meeting minutes show that the former's proposal is based on established policy guidelines and strengthens the market's view that BCB will curb inflation. In addition, on June 7th and 10th, the President of BCB expressed vigilance against the high expected inflation rate in the financial market and the short-term increase in neutral interest rates. Subsequently, the May Consumer Price Index (IPCA) released on June 11th showed an increase compared to the same period last month and last year, strengthening the market's expectation that BCB will suspend its easing cycle.
In the latest statement, three main changes can be seen: (1) a unanimous policy decision, (2) an increase in expected inflation rates, and (3) proposing alternative solutions to keep policy interest rates unchanged. (1) BCB is consistent in suppressing inflation. (2) Perhaps related to (1), under the benchmark scenario, the expected inflation rate will increase from 3.8% year-on-year in 2024 to 4.0% and from 3.3% to 3.4% in 2025. In addition, the proposal of (3) implies that BCB will not adjust policy interest rates temporarily. However, the two-way risk assessment of the benchmark scenario and the assessment of the impact of fiscal policy on monetary policy have not changed significantly from last time. In this context, the expectation of interest rate cuts in the short-term financial market has been eliminated.
In the future, attention will be paid to the confrontation between the Lula government and the BCB. Although it is foreseeable that the BCB will suspend its easing cycle, President Lula explicitly criticized the BCB CEO on June 18th. The opposition between the Lula government's demand for increased fiscal spending and interest rate cuts, while the BCB's demand for a suspension of the easing cycle and a reduction in budgetary spending, may deepen, which is seen as a disadvantageous factor in the Brazilian financial market.