Itaú BBA - Copom: symmetric risks, no rush to act

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Copom: symmetric risks, no rush to act

March 20, 2019

The Copom decided to keep the Selic rate unchanged at 6.5% pa, as widely expected, and now sees the balance of risks as symmetric.

The Copom has decided to keep the Selic rate unchanged at 6.5% pa, as widely expected, in an unanimous vote. Importantly, despite the lingering uncertainties regarding the continuity of reforms, the committee now sees the balance of risks to inflation as symmetric, conceding that recent indicators point to a slower-than-expected pace of economic recovery, but that an assessment of that behavior will require time. In particular, the committee signaled that such an assessment will not be completed in the short term, as it requires more observations on the economy’s evolution under lower uncertainty and free of the effects of the various shocks to which it was submitted last year. We will learn more about the authorities’ thinking with the release of the Copom minutes on Tuesday, March 26, at 08:00 Brasília time.

Details

In the statement, the committee assessed that recent economic activity data show a slower-than-expected pace, albeit with a gradual recovery. The external scenario remains challenging – on the one hand, risks associated with the normalization of interest rates in advanced economies have receded, while, on the other hand, risks associated with a global slowdown increased.

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

Inflation expectations reported in the Focus survey for 2019, 2020 and 2021 remained unchanged at 3.9%, 4.0% and 3.75%, respectively.

The Copom’s own forecasts in the scenario with constant interest at 6.50% pa and constant exchange rate at 3.85 BRL (average of the five working days up to the Friday preceding the Copom meeting) increased to 4.1% (from 3.9%) for 2019 and remained at 4.0% for 2020. Taken at face value, these forecasts show no room for easing, nor need for hiking rates. In the scenario with the interest and exchange rates reported in the Focus survey, Copom’s forecasts remained around 3.9% for 2019 and 3.8% for 2020. This scenario assumes interest rates that end 2019 at 6.50% pa and reach 7.75% in 2020, in addition to an exchange rate at 3.70 BRL in YE2019 and at 3.75 BRL in YE2020.

An important change, the committee now describes the balance of risks around inflation as symmetrical. Consistent with that, the emphasis that was being placed on inflationary risks related to the possible frustration of reform expectations and to possible changes in the external scenario for emerging economies was removed from the discussion.

As in recent statements, 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 lower 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 forecasts.

The next steps in monetary policy continue to be described as conditional on the evolution of economic activity, the balance of risks and inflation forecasts and expectations. In this context, the committee now emphasizes that it is important to observe the behavior of the Brazilian economy over time, in order to assess its evolution in the face of lower levels of uncertainty and in the absence of the shocks that happened in 2018. The Copom considers that this evaluation takes time, and will not be completed in the short term.

Therefore, the Copom has decided to keep the Selic rate unchanged at 6.5% pa, as widely expected, in an unanimous vote. Importantly, despite the lingering uncertainties regarding the continuity of reforms, the committee now sees the balance of risks to inflation as symmetric, conceding that recent indicators point to a slower-than-expected pace of economic recovery, but that an assessment of that behavior will require time. In particular, the committee signaled that such an assessment will not be completed in the short term, as it requires more observations on the economy’s evolution under lower uncertainty and free of the effects of the various shocks to which it was submitted last year. We will learn more about the authorities’ thinking with the release of the Copom minutes on Tuesday, March 26, at 08:00 Brasília time.



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