Brazil: BCB’s Guillen says commitment to inflation control is not Selic hike guidance

• BCB director says monetary policy should re-anchor inflation expectations, but he sees less volatility
• Guillen says eventual Selic hike would be gradual if it comes at all
• Guillen says new hike cycle would not buy credibility

BCB Economic Policy Director Diogo Guillen said Thurs. that a strong commitment to inflation control should not be confused with guidance for a new monetary tightening cycle. Guillen added that monetary policy should be conducted to re-anchor inflation expectations and that these expectations for end-2024 have not been as volatile in recent weeks as they were previously. Analysts polled by the BCB this past week increased their forecast for end-2024 inflation for the last seven weeks, but the increase in magnitude has been slowing. These analysts now forecast inflation to reach 4.26% at year-end.

When asked about a possible hike in order to increase the Copom's credibility, Guillen said he does not believe a rate increase would buy credibility. Credibility is gained, rather, by conducting an appropriate monetary policy, he added. The director also said that an eventual increase in the Selic, if it comes at all, would be gradual, replicating what BCB Governor Roberto Campos Neto?said?recently. He added that the 1.4% q/q growth in Q2 GDP came as a surprise for the BCB.

Overall, Guillen's comments reflect the stance adopted by the Copom in its latest?minutes, which is a hawkish tone but without any guidance for the next monetary policy decision. The majority of analysts polled by the BCB still see the Selic unchanged at 10.50% through to year-end, but the possibility of a hike gained momentum after Copom members replicated the hawkish tone in comments, especially those from BCB Governor Roberto Campos Neto and BCB Monetary Policy Director Gabriel Galípolo. The latter was also nominated by the president to replace Campos Neto, whose term expires at year-end. We believe the Copom will decide to hold the Selic at its next policy sitting on Sep 18 and will indicate that any possible rate move will be data based. The data released so far, in our view, does not demand any action from the BCB, as the Copom just paused the easing cycle in June.