Central Bank Review: Keeping its options live

Research evidence excerpt

Central Bank Review: Keeping its options live

IdeaM11.00% in previous meeting), and BRL at 5.10 (from 5.00).

BCB's tone on growth shifted from slightly dovish to hawkish. Central bank now

notes that activity indicators point to an acceleration in 1Q26, with cyclical sectors

resuming a significant role.

Our view: the statement turned more hawkish on the assessment of the macro

scenario, as we expected. We expect the BCB to hold at the next August meeting,

keeping rates at 14.25% for most of the year (we expect resumption of easing in

December, with rates at 14.00% by end-2026 and 11.50% by end-2027). We believe

the BCB did not completely rule out the possibility of another cut at the next

meeting if data allow, but we anticipate the rise in inflation expectations to continue

and ultimately to further limit the room for another rate cut.

Our Morgan Stanley Semantic Index slightly increased in the hawkish camp ( Exhibit

1 ).

Market reading (EM strategy): In our view, the BCB statement essentially validated

market expectations going into the release. Prior to the meeting, market pricing

incorporates an ~80% chance of a 25bp cut. It also incorporated expectations that

the statement would signal a potential pause in the easing cycle, with hawkish

nuances but without validating premia for hikes (50bp of tightening premia priced

in).

In our view, the paragraph about alternative scenarios could be interpreted by

market participants as the BCB communicating that hikes are not on the table at the

moment because they would potentially push medium-term inflation below the

target, but phrased in a way that explicitly avoids mentioning tightening or hikes

(and leaving it open-ended for the reader). Still, we would not necessarily expect