Itaú BBA - Copom to keep the Selic rate at 6.50%, if data allows it

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Copom to keep the Selic rate at 6.50%, if data allows it

June 21, 2018

The Copom kept the Selic rate at 6.50%, in line with our call and the market’s. We expect the Selic rate to remain at 6.50% until year-end.

The Copom kept the Selic rate stable at 6.50%, in line with our call and the majority of market analysts’. In the statement, the Copom argued that the evolution of the base-case scenario and the balance of risks points to a stable Selic rate. The statement reaffirms the Committee’s commitment to a classic inflation targeting regime, clearly rejecting the use of monetary policy as a tool to stabilize the exchange rate.  The Copom’s inflation forecasts for 2019 (lower-than-target in the market scenario and close-to-target in the reference scenario) are in line with the Copom’s indication of stable rates. Our call remains that the Selic rate will stay at 6.50% until year-end. We’ll learn more about the Copom’s rationale with the minutes of the meeting, next Tuesday, June 26th, and the Q2 Inflation Report next Thursday, June 28th (both at 08:00am, Brasília time).

Details

In the statement, the Committee assessed that data for the month of April suggest more consistent activity than in previous months, but that the trucker’s stoppage in May makes it difficult to read the most recent evolution and should have impact on indicators related to May and June. The baseline scenario contemplates continuity of the process of economic recovery, in a more gradual pace. The external scenario continues to be described as more challenging and more volatile, with lower risk appetite in relation to emerging economies.

The Copom expects that, in the short-term, inflation will reflect the upward effects (in the committee’s wording, significant and temporary) of the trucker’s stoppage and relative price adjustments. However, underlying inflation measures remain at low levels, including the components most sensitive to monetary policy (that is, service prices).

Inflation expectations, according to the central bank’s Focus survey, rose to 3.9% for 2018 (from 3.5% in the previous meeting) and 4.1% for 2019 (from 4.0%), remaining at 4.0% for 2020. Regarding Copom's own forecasts, inflation in the market scenario rose significantly to 4.2% in 2018 (from 3.6%) and fell to 3.7% in 2019 (from 3.9%), assuming that the interest rate ends 2018 at 6.50% and 2019 at 8% and with the exchange rate at R$/US$ 3.63 at the end of 2018 and R$/US$ 3.60 at the end of 2019. With a constant interest rate of 6.50% and exchange rate at R$/US$ 3.70 (rounded average of the five business days to the Friday before the meeting), forecasts are around 4.2% for 2018 and 4.1% for 2019.

The Copom emphasized that upward and downward risks remain in its central scenario. The main downside risk to inflation comes from the persistence, through inertial mechanisms, of low levels of inflation. Upside risks include the frustration of the economic reform agenda, which would affect risk premiums, pushing inflation upwards, as well as the continuation of the reversal of the external scenario for emerging economies – according to the committee, the latter risk has intensified since the last meeting, while the risk of inflation being significantly below the target in the relevant horizon has diminished. 

The Copom reiterated that the economic scenario prescribes stimulative monetary policy, with interest rates below the structural rate (read neutral). He also stressed that the continuation of the necessary reforms and adjustments is essential to keep inflation low in the medium and long term, to allow for a drop in structural interest rates and for the sustainability of the economic recovery. 

The Copom kept the Selic rate stable at 6.50%, in line with our call and the majority of market analysts’. In the statement, the Copom didn’t explicitly indicate its view for the next meeting, but argued that the evolution of the base-case scenario and the balance of risks points to a stable Selic rate. The Copom’s inflation forecasts under the market scenario (which assumes Selic rate rising to 8% in 2019) were set at 4.2% for this year, and 3.7% for next year. In the reference scenario, which assumes stable Selic and FX rate, inflation forecasts are set at 4.2% in 2018 and 4.1% in 2019. These forecasts for 2019 (lower-than-target in the market scenario and close-to-target in the reference scenario) are in line with the Copom’s indication of stable rates.

The statement also reinforced the commitment with the inflation targeting regime by reinstating that monetary policy will not respond mechanically to exchange rate movements, only if secondary effects impact prospective inflation. Also important, the text indicates that a deterioration in the balance of risks for inflation that could trigger a monetary policy response would require signs that the recent shocks are spreading to other prices – thus, it will be very important to monitor the behavior of core inflation measures, as well as inflationary expectations. We continue to expect the Selic rate to remain stable at 6.50% until the end of the year. We will have more information on the rationale behind the Copom’s decision in the minutes of the meeting, which will be released on Tuesday, June 26, and the Inflation Report for the second quarter, which will be published on Thursday, June 28 (both 8:00 am Brasília time).



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