Itaú BBA - Copom Cockpit: Central bank under new leadership, but Selic rate is set to remain stable

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Copom Cockpit: Central bank under new leadership, but Selic rate is set to remain stable

March 15, 2019

Copom should keep the Selic rate stable at 6.5% pa and be cautious about the balance of risks to inflation

For the version with all charts and tables, please open the attached pdf file
 

 The Brazilian Central Bank's Monetary Policy Committee (Copom) meets again next week. The Copom's inflation forecasts for 2019 and 2020 in the market scenario (which includes the exchange and interest rates forecasts reported in the Focus survey) will probably recede slightly from the February’s meeting. In the reference scenario (which assumes constant exchange and interest rates), inflation forecasts for 2019 and 2020 tend to remain stable from the committee’s previous meeting.

 With inflation forecasts anchored around the respective targets up to 2021, in a context where the level of slack in the economy remains high, we believe that the Copom will keep the Selic rate stable at 6.5% p.a. in the March meeting. The committee will probably emphasize that the conduction of monetary policy will remain vigilant and preserve flexibility to react to deviations from the base case scenario.

 Given recent speeches by new Copom members, we would not be surprised if the committee highlighted that the economic activity recovery has disappointed expectations. Nevertheless, we believe that the committee will continue to signal an asymmetric balance of risks, biased towards inflation, as the situation may deteriorate quickly if the pension reform does not advance at the expected pace and magnitude. In fact, uncertainty is high surrounding the reform’s timeframe in Congress and its fiscal impact when approved, suggesting the need for caution with the balance of risks for inflation.
 

For the version with all charts and tables, please open the attached pdf file



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