BRASILIA, May 10 (Reuters) - Brazil's central bank board debated the merits of scrapping its prior guidance of a 50 basis point (bps) interest rate cut before it decided on a market-rattling 25 bps cut this week, according to a person familiar with the discussion.
The bank's rate-setting committee, known as Copom, cut its benchmark interest rate by 25 bps on Wednesday after six straight reductions of twice that size, despite dissent from directors appointed by President Luiz Inacio Lula da Silva.
The divisions on the nine-person committee, with all four of Lula's appointees voting for another 50 bps cut, stirred concern among investors about a dovish policy shift once the government has appointed a majority of the board next year.
However, the source familiar with deliberations said the most controversial part of the discussion was whether to break with the bank's explicit prior guidance. In March, policymakers signaled another rate cut of 50 bps this month.
The central bank declined to comment.
The details of the policymakers' debate, first reported by local newspaper Valor Economico, also show that bank president Roberto Campos Neto's comments last month on abandoning the guidance did not represent a consensus on the board.
At an event in Washington on April 17, Campos Neto paved the way for a smaller rate cut by mentioning four possible scenarios, including "a system in which the uncertainty becomes and continues to be very high, but it doesn't change significantly, which might mean a reduction in pace."
His remarks came after hot U.S. inflation data triggered a wave of asset repricing worldwide on fears of rates staying high for longer in the world's biggest economy. They also followed the Brazilian government's move to loosen a 2025 fiscal target, which Campos Neto said impacted the country's risk premium.
Campos Neto consulted written remarks as he made those comments, indicating his speech was not improvised.
Five days later, back in Brazil, Campos Neto was even clearer at another event, where he said, "What we did last week was say that we cannot provide 'guidance' because we have a very high level of uncertainty."
His remarks firmed market bets on a 25 basis-point cut this week, although some economists still believed the central bank would stick with previous guidance due to more benign inflation prints and a partial recovery of Brazil's exchange rate.
Split decisions are not uncommon on central bank boards worldwide, as was the case in Brazil in August 2023, when policymakers kicked off this easing cycle. The shifting economic outlook has also led other central banks to change tack.
But the divisions at Brazil's central bank are especially sensitive because Lula and his leftist allies have been vocal critics of recent monetary policy.
Campos Neto and two other board members appointed by former President Jair Bolsonaro end their terms in December, paving the way for Lula's appointees to form a majority on the board. (Reporting by Marcela Ayres Editing by Brad Haynes and Josie Kao)
