Itaú BBA - Copom: no surprise for now, slower easing later

Macro Brazil

< Back

Copom: no surprise for now, slower easing later

September 8, 2017

The Copom delivered the widely expected ouctome, a 100bps rate cut to 8.25%pa, in an unanimous vote.

The Copom delivered the widely expected ouctome, a 100bps rate cut to 8.25%pa, in an unanimous vote. The meeting statement suggests the plan to slow down the pace of easing moderately, which, based on a communication pattern established by this Copom, we read as a signal that the October move will probably be a 75bps rate cut, that would take the Selic to 7.5%pa. After that, the Copom would close the year with another cut, by 50bps, with the Selic at 7.0%, in a gradual end of the cycle. We thus change our year-end call to 7.0%, from 7.25% previously. As usual, the rationale of the Copom meeting will be explained in more detail with the release of the meeting minutes next Tuesday, at 08:30am Brazil time. 

Details

In the statement, the Committee assesses that data released since the last policy meeting are consistent with a gradual economic recovery – indicating that, for the Copom, the economy is already post stabilization. There is no mention that the increase in uncertainty on reforms and (fiscal) adjustment might have negative implications on activity.

The external scenario is still deemed to be favorable, as the global recovery, which is no longer deemed to be gradual, has yet to pressurize financial conditions in advanced economies, supporting risk appetite in emerging economies. 

The committee evaluates that inflation developments remain quite favorable (only favorable, previously), with several measures of underlying inflation at low levels, including of the components most sensitive to monetary policy (that is, service prices). The committee stresses the level of inflation, but no longer talks of disinflation. 

Inflation expectations as per the Central Bank’s Focus Survey increased to around 3.4% for 2017 and remained at 4.2% for 2018 and at 4.25% for 2019. With respect to the Copom's own forecasts, inflation in the market scenario declined to 3.3% for 2017 and increased to 4.4% for 2018, assuming interest rates end 2017 at 7.25%, decline to 7.00% in the beginning of 2018 and then increase to 7.50% in the end of 2018.

The Copom stresses that this central scenario involves risk factors to the upside and downside. The main downside risks to inflation are possible second-round effects of the lasting food price shock and of muted industrial goods inflation, as well as the persistence, through inertial mechanisms, of the current low inflation levels. The upside risks include frustration of the economic reform agenda, that would affect risk premia and increase inflation, and a reversion of the currently favorable external scenario. 

Importantly, the committee notes that the economic juncture warrants an expansionary policy stance, with interest rates below their structural (read neutral) level. It also highlights that reforms, such as the recently approved changes in the credit market (a reference to a new approach to the pricing of BNDES credit) contribute to lower estimates of the structural interest rate. 

The Copom notes that economic conditions allowed keeping the pace of easing in the current meeting. Looking forward to the next one, the committee states that with the economy performing as expected, and (importantly) taking into account the stage of the cycle, it would be proper to moderately slow down the pace of easing – moderate increments meaning, judging by recent communication patterns, 25bps increments. With the usual caveats that this is its view at this moment in time, and that future decisions wil depend on economic activity, estimates of the magnitude of the cycle, etc, the committee envisages a gradual end of the easing cycle. 

A recovering economy, and inflation that is at the (likely) bottom of this cycle support the Copom´s intention to slow down and eventually end the cycle, which we think, for now, will take place with a sequence of cuts of 75bps in October and 50bps in December, with the Selic at 7.0%, and all-time low, by the end of the year. 

The rationale of the Copom meeting will be explained in more detail with the release of the meeting minutes next Tuesday, September 12, at 08:30am Brazil time.


 



< Back