Brazil: Uncertainty may slow down pace of interest rate cuts.

The Copom (Board of CB governors) minutes make a considerable effort to dispel the impression that the end of forward guidance could lead to a higher rate at the end of the monetary easing cycle.

The debates among members of the Monetary Policy Committee (Copom) of the Central Bank suggest that increased uncertainties in the international and domestic environment could lead to a reduction in the pace of interest rate cuts to 0.25 percentage points starting in June, rather than just the end of forward guidance for the Selic rate cut.

In the minutes released this Tuesday morning, some members of the committee argued that if uncertainty remains high, “a slower pace of monetary easing may prove appropriate.”

Meanwhile, the Brazilian Real has depreciated above the level of 5 units per USD, which is troubling for many investors.

Since the beginning of the easing cycle in August 2023, the Copom had been cutting the Selic rate target by 0.5 percentage points and signaling similar cuts for the next two meetings. Last week, the Copom lowered the interest rate from 11.75% per year to 10.75% per year and signaled a new cut of 0.5 percentage points only for May. Decisions from the June meeting onwards are still open.

However, in theory, a more uncertain scenario could also demand greater caution in lowering interest rates. In general, when central banks perceive less certainty and more risks in the future outlook, they tend to proceed more slowly with movements in the basic interest rate.

This was more or less the line adopted by “some members” of the Copom, a term used when at least three of the nine members of the committee express a different view from the others.

The argument of these members, however, is limited to the pace of interest rate cuts, and not to the size of the easing cycle. They say that, whatever the final rate that the Copom adopts, uncertainty – if it persists until the June meeting – demands greater caution in the pace of cuts.

This is the kind of concern that goes beyond just uncertainties. There are some members of the Copom who seem more convinced that lowering inflation, especially in services, will be more challenging in an environment of increased economic activity.

They appear closer to turning the tide, adopting a less favorable baseline scenario, which would be a step beyond merely acknowledging increased uncertainty. However, in last week’s meeting, there is no news that they advocated for this, at least nothing is mentioned in the minutes.

It will be important to monitor the data that will be released in the coming months to see if over time, this thesis loses strength or gains momentum – and thus whether the trajectory of interest rate cuts based on the baseline scenario will be maintained or modified.