“New” Central Bank debuts with key rate under pressure | Economy

During the last meeting of 2024, the Monetary Policy Committee (COPOM) increased the benchmark interest rate to 12.25% from 11.25% per year and signaled further hikes of 100 basis points at the next two meetings, scheduled for January and March. The committee assessed that the environment is more adverse yet less uncertain, justifying their forward guidance on future steps.

To implement this guidance, COPOM will have three new members and a new president. Gabriel Galípolo, currently the director of monetary policy, will take over as president. Economist Nilton David, formerly with Bradesco’s treasury, will be the director of monetary policy. Long-serving employee public servants Gilson Vivan and Izabela Correa will assume the areas of regulation and conduct supervision, respectively. This marks the first leadership change at the Central Bank since it gained autonomy in 2021.

Fernanda Guardado, chief economist for Latin America at BNP Paribas and a former Central Bank’s director, praised the appointments. Ms. Guardado noted that Mr. Vivan has long been involved in the initial phase of Copom meetings, which include an economic scenario briefing, and has experience monitoring the credit cycle. The former Central Bank director also highlighted Mr. David as a highly experienced trader and Ms. Correa as having a well-respected career.

“We should not prejudge. Gabriel [Galípolo] has been with COPOM for a year and a half, learned, and made tough decisions as part of the committee, so I think we’ll have to see how this committee behaves moving forward. There’s a clear perception that it’s a complicated situation. There’s already guidance, which helps ease some pressure on this new committee, particularly for the newcomers, in the next two decisions,” said the former director.

Natalie Victal, chief economist at SulAmérica Investimentos, pointed out that there will always be some uncertainty about the decision-making process of a new committee composition, but noted that the Central Bank still maintains strong institutional integrity. “Of course, there’s still uncertainty about how the decision-making process will unfold, which we’ll only discover over time, but the signals we’ve had so far do not, in any way, discredit the new board,” she said.

The scenario that this board will face is vastly different from what was expected at the beginning of 2024. The year started with the key interest rate Selic at 11.75% in a cycle of cuts that ended in June. In January, the Focus survey projected the Selic would close the year at 9%, with inflation projections at 3.87% for 2024—above the 3% target but within the tolerance range.

According to Ms. Guardado, with BNP Paribas, economic activity in 2024 was stronger than anticipated; the credit cycle was more expansive; fiscal policy was more expansionist, and there was a depreciation of the real by about 20% over the year. “The deterioration of the inflationary scenario throughout the year was significant,” she said, mentioning increased volatility surrounding BC decisions and communication.

One moment of volatility was the Copom meeting in May, where there was a split among the board. Five members appointed by the current government advocated for a 50 bp cut, as previously signaled by the board at the prior meeting. Meanwhile, Mr. Campos Neto and the four directors appointed by the Jair Bolsonaro administration voted for a 25 bp reduction.

The market reacted with a rise in long-term future interest rates, reflecting a perception of increased sensitivity of the Central Bank to political pressures in the future. The following day, Mr. Galípolo clarified that the discussion was more about the benefits of slowing the pace of cuts versus the cost of abandoning the guidance.

Alessandra Ribeiro, a partner and director of macroeconomics and sectoral analysis at Tendências Consultoria, noted that the division was poorly received by the market because there was already an atmosphere for it, with criticisms from President Lula and Workers’ Party members towards the Central Bank. “The atmosphere still lingers, and the market does not fully price in a Central Bank that is completely technical and immune to such pressures. The market will remain cautious until there is evidence that it will reach 2026, an election year, without greater leniency from the Central Bank. Even if there is indeed a recovery of credibility, the market still prices in a risk of greater leniency.”

At the next meeting following the division, the board decided to halt the cycle of cuts and kept the rate unchanged, this time unanimously. Since then, there have been no dissensions in COPOM votes, but expectations have worsened. According to the Focus survey, Brazil’s benchmark inflation index IPCA is expected to hit 4.89% in 2024 and 4.60% in 2025, with GDP growth of 3.42% this year and 2.01% next year, and the Selic at 14% by the end of 2025.

At the end of this year, the government’s announcement of R$70 billion in spending cuts over the next two years was poorly received by the market. Fiscal issues have been cited as a reason for the recent rise in the interest rate curve and the dollar, which is trading above R$6 and reached R$6.30. The minutes from the last COPOM meeting indicated that the announcement significantly affected risk premiums, inflation expectations, and the exchange rate.

In the week leading up to Christmas, the Central Bank began daily interventions in the currency market, which, coupled with comments from Mr. Galípolo and Mr. Campos Neto during the Inflation Report interview, helped reduce volatility in the exchange rate and future interest rates. On the occasion, Mr. Galípolo said that the idea of a “speculative attack” did not accurately represent recent exchange rate movements, and Mr. Campos Neto reiterated that the Central Bank does not intend to change the exchange rate trajectory but rather address dysfunctions.

The interview symbolized the presidential transition and the conclusion of a process that had been underway for several months, including joint trips for meetings of the Bank for International Settlements (BIS). During the interview, the future director thanked his predecessor, and both made it clear that the last Copom meetings were part of the transition and that Mr. Galípolo’s influence had increased even before taking office. “Roberto was very clear that he understood this was a meeting meant to leave the responsibility to me,” said Mr. Galípolo.