Brazil's Central Bank May Mull Key Rate Cut, Just Not Today

(Bloomberg) -- When Brazil’s central bank meets on Wednesday, its outgoing President Ilan Goldfajn will leave the door open for his successor to deliver an unprecedented borrowing cost cut at his first policy meeting.

Since at least 1996, when the country’s current monetary policy board was created, no incoming bank governor has ever cut the benchmark Selic in his first meeting. Roberto Campos Neto, who was appointed by President Jair Bolsonaro and will face his Senate confirmation hearing as soon as this month, could be the first. The chances are so good that when Campos Neto attended an event in Rio de Janeiro last month, several former central bank chiefs joked how it was going to be smooth sailing for him and how he was lucky.

"Much of the groundwork was done over the last two and a half years, and the next central bank chief inherits better conditions," said Mauricio Oreng, senior strategist at Rabobank in Sao Paulo. "The chance of a cut in the next decision is gaining certain momentum," he said in reference to the March monetary policy meeting over which Campos Neto is expected to preside.

Policy makers led by Goldfajn on Wednesday will likely hold the Selic for the seventh straight meeting, according to analysts in a Bloomberg survey. Three months ago, both traders and analysts saw the key rate rising to 8 percent this year. Since then, they changed their forecasts to a hold, while swap futures also show traders are already pricing in a mild bias toward a cut.

Market forecasts for annual inflation are seen at or below target through 2021, according to the latest weekly central bank survey of about 100 analysts. While economic growth is gradually picking up, it’s still below capacity at a projected 2.5 percent clip this year. So why doesn’t Goldfajn cut the Selic from an already record low of 6.50 percent?

It’s mostly because of doubts over the future of belt-tightening reforms in Congress, says Simone Pasianotto, chief economist at REAG Investimentos Ltda, a Sao Paulo-based wealth management firm. "The scenario is becoming more dovish, but politics are still tense and uncertain," she said. "Despite a more relaxed situation, it would be prudent in March for the central bank to wait a bit more before moving."

Renewed Confidence

Chances that Campos Neto could ease borrowing costs spotlight not only benign inflation but also renewed confidence in the country’s monetary authority following years of government meddling. Three of the last five central bank governors had to hike rates upon taking office, in large part to establish market credentials in a country that struggled with hyper-inflation until the mid-1990s.

Goldfajn has helped eliminate subsidized loans that undermined the efficiency of monetary policy, taken steps to reduce high credit card charges and forged regulation for the fintech industry to grow. Now, he will pass the baton to the 49-year-old former Santander treasurer for the Americas.

To assume the post, Campos Neto needs a simple majority in both the Senate’s Economic Affairs Committee and floor. A date is not set, but expectations are for a vote in the second half of February, giving him enough time to be sworn in before the next monetary policy decision on March 20.

While some senators will question a nominee with a private sector background as they have done in the past, Campos Neto shouldn’t have any difficulties in getting approved, said Fernando Bezerra Coelho, a member of the Senate Economic Affairs Committee.

"I don’t see any difficulty," he said. "Ilan’s tenure is testimony that market professionals can do a great job."

--With assistance from Rafael Mendes.

To contact the reporters on this story: Raymond Colitt in Brasilia at rcolitt@bloomberg.net;Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Matthew Malinowski, Robert Jameson

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