Brazil’s Central Bank Is Set to Slow Pace of Rate Cuts After Changing Guidance

(Bloomberg) -- Brazil’s central bank will likely slow the pace of monetary easing after policymakers evoked growing economic and fiscal uncertainties to back off their guidance for an additional half-point cut to the benchmark interest rate.

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Twenty-two of 33 analysts surveyed by Bloomberg expect the bank led by Roberto Campos Neto to lower the benchmark Selic by a quarter-point to 10.5% after markets close on Wednesday. The remaining eleven bet on a seventh straight reduction of 50 basis points. Traders are also split, with digital options in the local stock market indicating a 81% chance that policymakers will temper the easing pace.

Campos Neto set the stage for the most suspenseful rate decision so far this year by telling investors last month that the bank is no longer committed to keeping its easing pace, but is instead considering four possible economic scenarios, including one with smaller rate cuts. The change in forward guidance surprised investors who were already worried about the Federal Reserve’s reluctance to start reducing borrowing costs and also Brazil’s weakening fiscal target.

Read more: Under Lula, Doves Are Rapidly Gaining Power in the Central Bank

The new guidance comes as data shows consumption remains resilient to high interest rates. In March, retail sales were stable from the month prior, beating analysts expectations for a third consecutive month.

What Bloomberg Economics Says

“Brazil’s central bank is widely expected to cut interest rates again at its May 8 meeting, but there’s disagreement on whether policymakers will stick to their 50-basis-point path or slow the pace. We think that debate will extend to the BCB board.”

— Adriana Dupita, Brazil and Argentina economist

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Brazil’s decision will be published on the central bank’s website after 6:30 p.m. in Brasilia, with a statement from its board. Here’s what to look for:

Four Scenarios

Investors will scan the bank’s statement for any guidance about its next rate decision in June, and whether there’s still unanimity on the board. Unlike in prior rate meetings, rising uncertainties on the global and domestic fronts make Wednesday’s statement open-ended.

“They could now remove their forward guidance, given that board members have appeared to differ in their speeches,” said Carla Argenta, chief economist at CM Capital.

If central bankers opt for a quarter-point cut, investors will interpret that move as the start of a new pace even if policymakers refrain from explicitly saying so. At the same time, analysts will also be on the look-out for more details on the scenarios first described by Campos Neto last month in a meeting that was opened to the press at the last minute.

Reading from prepared notes, Campos Neto said a “big repricing” of assets in response to higher global rates could jeopardize Brazil’s central bank plans. While less global uncertainty would allow the board to carry on with half-point cuts, high volatility would force it to pare down the easing pace, he said.

Two other scenarios — in which the bank would have to change its balance of risks or its base-case outlook — seemed murkier.

Monetary Policy Director Gabriel Galipolo refrained from mentioning the four scenarios in his latest public speech, sparking speculation that not all board members may be in agreement. At a news conference last week, Supervision Director Ailton Aquino said a “cautious” stance is needed due to market volatility.

“The global scenario requires a more cautious pace,” said Laiz Carvalho, Brazil economist at BNP Paribas. She expects a hawkish tone in the post-meeting statement and a unanimous decision to cut rates by 25 basis points. “We could see a debate about their pace in the minutes” to their rate decision.

Fiscal Woes

Central bankers could reinforce the importance of fulfilling fiscal pledges after President Luiz Inacio Lula da Silva’s government opened the door for more spending in 2025. The economic team said it will aim for a balanced primary budget — which excludes interest payments — instead of a surplus next year.

On top of that, devastating floods in southern Brazil are increasing spending pressure even further.

Moody’s Ratings raised Brazil’s credit outlook to positive last week, though the decision is unlikely to change the bleak view investors have on the government’s ability to shore up public accounts.

“Between signs of political fatigue on efforts to raise revenues, little will to cut expenditures and moderate growth, public debt seems poised to grow,” JPMorgan Chase & Co. analysts Cassiana Fernandez, Vinicius Moreira and Mirella Sampaio wrote in a recent research note.

--With assistance from Andrew Rosati and Giovanna Serafim.

(Updates number of economists surveyed and and percentage of digital options in second paragraph.)

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