Central Bank reverses policy in September

180-degree policy turnaround: At its meeting on 17–18 September, the Monetary Policy Committee (COPOM) of the Central Bank of Brazil (BCB) decided to increase the SELIC rate by 25 basis points to 10.75%. The hike, which had been priced in by markets, was unanimous. The increase was the first since 2022, and followed 325 basis points of cuts in August 2023–May 2024.

Inflation outlook deteriorates: Above-target inflation, unanchored inflation expectations and an overheated economy led the BCB to reverse course at its September meeting; both headline and core inflation have been above-target in recent months, and the inflation outlook has deteriorated, with the BCB upwardly revising its 2024 and 2025 inflation forecasts by 0.1 percentage point to 4.3% and 3.7%, respectively. Accordingly, both forecasts moved closer to the upper bound of the Central Bank’s 1.5–4.5% tolerance band. Moreover, the COPOM deemed risks to the inflation outlook skewed to the upside. Regarding the economy, economic activity was more dynamic and the labor market was more tight than the COPOM expected, reducing the need for monetary stimulus.

Tightening cycle is only getting started: The Central Bank provided no explicit forward guidance, but stated that the speed and size of rate hikes as part of “the cycle now initiated” would be determined by the extent to which inflation converges to target. All of our panelists see additional rate increases before the year ends, with a 25–100 basis point spread. The next meeting is set for 5–6 November.

Panelist insight: Goldman Sachs’ Alberto Ramos commented: “We expect the Selic to reach 11.50% by Dec-24 and 11.75% by Jan-25. We expect rate cuts to start at the Jun-25 meeting and the Selic rate to end-2025 at 10.25%. The risk to our baseline Selic forecast is balanced. If the BRL and expectations fail to improve, we would not rule out a deeper 150-200bp hiking cycle. Conversely, a stronger BRL and improving expectations and balance of risks for inflation could lead to a milder 100bp rate hiking cycle.”

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