Itaú BBA - Copom Cockpit: a second 75-bp cut

Macro Brazil

< Volver

Copom Cockpit: a second 75-bp cut

junio 10, 2020

Copom will take Selic rate to 2.25% p.a. and may signal an interruption of monetary adjustment for now.


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

 The Copom will meet again next week, on June 16 and 17. We expect the committee’s inflation forecasts for 2020 to decline to 1.8% from 2.4% in hybrid scenario 1 (which considers constant exchange rate and interest rate according to the Focus survey) and to 1.8% from 2.3% in the reference scenario (with constant exchange rate and interest rate). For 2021, hybrid scenario 1 will likely retreat to 3.1% from 3.4%, while the reference scenario is expected to slip to 3.0% from 3.2%.

 We believe that the Copom will make another 75-bp cut in the Selic benchmark rate, to 2.25% p.a. The committee should continue to emphasize that we are facing a particularly uncertain environment and, in view of the lags with which monetary policy usually operates, the Copom should signal the interruption of the monetary adjustment, entering an observation period to assess the effects of recent decisions and thus define its next steps.

 Anchored expectations and substantial spare capacity in the economy indicate a prospective scenario of below-target inflation in the relevant monetary policy horizon. In this environment, considering a reduction in external risk and the expectation that the virus will spread more slowly, we expect the monetary authority to maintain the base rate at this extraordinarily stimulative level of 2.25% p.a. for some time, even with some risk arising from the fiscal path.

 On the other hand, if we continue to see additional disinflationary pressures, this will imply a downward trend in inflation forecasts, possibly making room for further declines in the Selic rate. We understand that, in principle, as long as authorities act with the goal of reaching the inflation target in the face of a persistent disinflationary shock, there are no conceptual limits to the slide in the Selic rate. However, current fiscal deterioration raises important questions about the sustainability of the low interest rate environment in the medium term. 



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



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