Itaú BBA - Copom: a last (hawkish) salvo

Macro Brazil

< Back

Copom: a last (hawkish) salvo

February 6, 2019

The Copom decision came in as expected, but the message was more hawkish than we had anticipated.

The Copom decision came in as expected – the  authorities left the base rate unchanged at 6.5%pa, in an unanimous vote, but the message was more hawkish than we had anticipated. While the committee concedes that inflation risks have receded, it still sees them as tilted to the upside, and reinforced the message that monetary policy needs to be implemented with “caution, serenity, and perseverance”, which hints at the absence of any willingness to shift the monetary policy stance. We will learn more about the authorities´ thinking with the release of the meeting minutes on Tuesday, February 12, at 8 AM Brasília time. We expect the Copom to leave the base rate unchanged until year-end.

Details

In the statement, the committee assessed that recent economic activity data continues to show a gradual recovery of the Brazilian economy. The external scenario is still challenging, but there was some relief and change in risk profile. On the one hand, risks associated with the normalization of interest rates in the advanced economies decreased, while, on the other hand, the risks associated with a global slowdown increased.

The committee continues to consider underlying inflation measures at appropriate or comfortable levels, including those components most sensitive to the economic cycle and monetary policy.

Inflation expectations from the Focus survey fell to 3.9% from 4.1% in 2019 and remained around the 4.0% and 3.75% targets for 2020 and 2021, respectively.

The Copom’s own forecasts in the scenario with constant interest rates at 6.50% and constant exchange rate at 3.70 BRL (average of the five working days up to the Friday that preceded the Copom meeting) retreated slightly to 3.9% for 2019 (from 4.0%) and remained at 4.0% for 2020. In the scenario with the interest and exchange rates reported by the Focus survey, Copom’s forecasts remained around 3.9% for 2019 and increased to 3.8% for 2020 (from 3.6%). This scenario assumes interest rates that end 2019 at 6.50% and reach 8.0% in 2020, in addition to an exchange rate at 3.70 BRL in YE2019 and 3.75 BRL in YE2020.

The committee continues to see asymmetric risks around its baseline scenario for inflation, with greater weight on the upward risks to the prospective inflation trajectory, which are: a possible frustration of the expectations of reforms and a deterioration of the conditions for emerging economies. However, the monetary authority assesses that these risks have cooled down – especially those that concern the external environment.

The Copom reiterated that the economic situation prescribes stimulative monetary policy, that is, with interest rates below the structural rate. It was also repeated that the continuity of the necessary reforms and adjustments in the Brazilian economy is essential for the maintenance of low inflation in the medium and long term, for the fall in structural interest rates and for the sustainable recovery of the economy. The perception of the continuity of this reform agenda affects, according to the committee, current macroeconomic expectations and projections.

Therefore, the decision came in as expected – the authorities left the base rate unchanged at 6.5%pa, in an unanimous vote, but the message was more hawkish than we had anticipated. While the committee concedes that inflation risks have receded, it still sees them as tilted to the upside, and reinforced the message that monetary policy needs to be implemented with “caution, serenity, and perseverance”, which hints at the absence of any willingness to shift the monetary policy stance. We will learn more about the authorities’ thinking with the release of the meeting minutes on Tuesday, February 12, at 8 AM Brasília time. We expect the Copom to leave the base rate unchanged until year-end.



< Back