Brazil: Campos Neto says Copom did not indicate rate hike, says FX intervention pondered

• Campos Neto says Copom members diverge on balance of inflation risks but that they are united in their decisions as never before
• Governor says the Copom thought about intervening in the exchange market but chose not to
• Campos Neto says governor transition will go smoothly

BCB Governor Roberto Campos Neto said Tues. that the Copom did not line up a coming Selic rate hike, according to comments made in an interview for O Globo. He said that though the market forecasts a Selic increase in 2024, this was not expected by economists. Economists polled by the BCB continue to expect flat rates this year, according to a poll released Mon. Expectations of a Selic hike have gained momentum in recent weeks after hawkish statements from Copom members and the above-expected GDP growth print for Q2.

The BCB governor said that the international scenario had improved of late, as had the FX situation. He acknowledged that Copom members still had divergences on the balance of risks for future inflation. The latest Copom minutes indicated an asymmetry in inflation risks, with more upside ones than downside factors. One main variable was the possible impact of the real devaluation on inflation. The BRL, however, has appreciated of late and this risk will likely be downplayed at the next Copom policy meeting in September, which would reduce the potential need for an interest hike.

Despite some divergence on inflation views, Campos Neto said that Copom members had never been so united in their decisions. The governor noted that Copom efforts to reduce noise on monetary policy had increased since the committee was divided over the magnitude of the Selic rate cut at its May meeting. At that meeting, Copom members chosen by President Luiz Inacio Lula da Silva took a more dovish stance whereas those nominated by the previous government were more hawkish, with the latter winning out and the scale of easing being reduced to 25bps from the previous 50bps. This division increased uncertainties related to possible political influence on the committee, but these worries have since been mitigated by the fact members have been voting unanimously ever since.

Campos Neto also said that the Copom had analyzed the possibility of intervening in the FX market and came close to doing so, but ultimately chose not to. In the BCB's analysis, the devaluation of the real that was observed was not due to a market dysfunction, but rather to a worsening of the perceptions of country risk.

Finally, Campos Neto added that the transition process that will see him replaced at year-end will be smooth. Lula is expected to name the next BCB governor in the next few weeks, with BCB Monetary Policy Director Gabriel Galípolo the current frontrunner. The president has not yet confirmed his name, but we believe that the delay is due to Lula's desire to confirm the name with Senate leader Rodrigo Pacheco before announcing it. The nominee will have to be approved by the Senate's economic committee, which has already stated that Galípolo would find an easy path in voting.

Overall, Campos Neto's comments reinforce that the view that the Copom has not given any real guidance as to its next policy decision in mid-September. Several financial institutions in Brazil are forecasting a Selic hike in 2024, but the average still expects the rate to remain at 10.50% to year-end, according to the BCB's Focus Report published Mon. Campos Neto has taken a hawkish tone of late, as has Galipolo, though the BCB head seems to want to clarify that this doesn't mean an automatic hike. We also believe that the governor's tone is focused on reducing uncertainties about possible political influence on the committee rather than indicating a hike at the next meeting.