Itaú BBA - Copom Cockpit: Easing with caution

Macro Brazil

< Volver

Copom Cockpit: Easing with caution

marzo 13, 2020

We expect the Copom to reduce the Selic rate by 25bps to 4.0% per year.


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

 

 The Copom will meet again next week, on March 17 and 18. We expect the committee’s inflation forecasts for 2020 to decline to 3.3% from 3.5%, both in the hybrid scenario 1 (which considers constant exchange rate and interest rate according to the Focus survey) and in the reference scenario (with constant exchange rate and interest rate). For 2021, the hybrid scenario 1 will likely decline to 3.6% from 3.7%, while the reference scenario is expected to decline to 3.7% from 3.8%.

 The note published by the Central Bank on March 3 showed that the Copom’s understanding at the time was that the impact of the coronavirus epidemic on the Brazilian economy due to the global slowdown would tend to dominate an eventual deterioration in the prices of financial assets (in other words, the exchange rate). As such, the note clearly signaled the possibility of further rate cuts ahead, especially considering that its release took place on the same day that the Fed cut its benchmark rate by 0.50 p.p. in an inter-meeting decision.

 The document also emphasized that the following two weeks would allow a more accurate assessment of the effects of the coronavirus outbreak on the prospective inflation path over the relevant monetary policy horizon. Therefore, it was evident that the committee wanted to observe the economic and financial effects caused by the epidemic in order to define its the next step with more precision. Since then, we have experienced strong exchange rate volatility, which has been accompanied by substantial fluctuations in the yield curve. This volatility in asset markets adds uncertainty to assessments about the next steps in monetary policy. We also observed a significant deterioration in the prospects for economic growth, both in the world and in Brazil, in 2020.

 We understand that, in net terms, developments in recent weeks, the evolution of the balance of risks and the outlook for inflation, allow for cautious additional easing, with two 25-bp cuts in the Selic rate, which is set to reach 3.75% at the May Copom meeting. In the current context, we believe that cuts of a greater magnitude could lead to tightening of financial conditions and, thus, act in a counterproductive manner. This risk, however, will depend to an important extent on the behavior of global markets, as well as on economic policy responses – particularly the pace of monetary easing – of central economies.


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



< Volver