Itaú BBA - Copom Cockpit: 25-bp cut in the first meeting of the year

Macro Brazil

< Volver

Copom Cockpit: 25-bp cut in the first meeting of the year

enero 31, 2020

We expect the Copom to cut the Selic rate by 25bps to 4.25% p.a. in its February 4-5 meeting.


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, on February 4-5. We expect the inflation forecasts in the market scenario (which includes exchange and interest rates according to the Focus survey) to recede to 3.4% from 3.5% in 2020, and to remain at 3.4% for both 2021 and 2022. In the hybrid 1 scenario (which assumes constant exchange rate and interest rate according to the Focus survey), estimates will likely drop to 3.5% from 3.7% in 2020 and remain at 3.7% for 2021 and 3.5% for 2022. 

• In our view, the balance of risks for inflation has improved since the last Copom meeting, with core inflation measures sustaining benign dynamics and inflation expectations remaining anchored. Moreover, the path of BCB's current forecasts indicates that the authorities may be surprised by lower-than-expected inflation in 1Q20. As for economic activity, there is a gradual recovery trend, but recent data have been mixed and spare capacity remains high under several metrics.

• The coronavirus epidemic, centered in China, has caused an increase in risk aversion and depreciation of assets in emerging economies, including Brazil. We believe that such effects tend to be temporary and that, in the medium term, these developments represent negative pressure on global economic activity and a potential downside risk for the recovery in Brazil.

• Notwithstanding the emphasis that has been given by the committee and its members to the uncertainties surrounding monetary policy transmission channels, we understand that the combination of the abovementioned factors indicates that the Copom will see room to further reduce the Selic rate by 25bps to 4.25% p.a. in its February 4-5 meeting.

• As for the next steps of the monetary policy, it is important to monitor whether the post-meeting statement will signal the intention of pausing the easing cycle in order to assess its lagged effects over time or keep the door open to another adjustment. In any case, the committee will likely emphasize, as usual, that its next steps will depend on the evolution of economic data, the balance of risks and inflation forecasts and expectations. For now, we maintain the view that the Selic rate will reach 4.0% p.a. by the end of the easing cycle, in March, but our scenario can be revised in light of BCB’s next meeting statement or subsequent communications. 


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



< Volver