Itaú BBA - Copom Cockpit: Resuming the easing cycle

Macro Brazil

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Copom Cockpit: Resuming the easing cycle

abril 30, 2020

We expect the Copom to reduce the Selic rate by 50 bps, to 3.25% pa, and to signal caution regarding additional movements.


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

 

 The Copom will meet again next week, on May 5 and 6. We believe the committee's inflation forecasts for 2020 will decline to 2.2% from 3.0%, both in hybrid scenario 1 (which considers constant exchange rate and interest rate according to the Focus survey) and in the reference scenario (which considers constant exchange rate and interest rate). For 2021, the hybrid scenario 1 is expected to decline to 3.3% from 3.6%, while the reference scenario is expected to decline to 3.2% from 3.6%.

 In the minutes of the most recent meeting (released on March 23) the Copom pointed out that the conduction of monetary policy required caution, given the economic situation at that juncture. At that time, the committee saw the maintenance of the Selic rate at 3.75% pa as adequate, emphasizing, on the one hand, the higher in uncertainty arising from the pandemic and, on the other, domestic risks stemming from possible frustrations with the reforms and deviations from the public accounts’ adjustment path.

 The evolution of the pandemic since then suggest that its impacts on the world and Brazil will be very severe. This reduces pre-crisis concerns that the output gap in Brazil may be narrower than estimated by traditional measures and, in a context of low current inflation and anchored inflation expectations, suggests that the central bank should continue the easing cycle. At the same time, the severe impact on public accounts of economic policies being adopted in response to the crisis caused by Covid-19 indicates that further moves to cut the basic interest rate should be implemented with caution.

 We expect the Copom to reduce the Selic rate by 50 bps, to 3.25% pa, at the meeting of May 5 and 6, and to signal caution regarding additional movements. We understand that a cut of this magnitude is consistent with the need for further stimulus to the economy at a time when economic activity is being strongly impacted by the Covid-19 pandemic. In light of the deterioration in public accounts resulting from the crisis, interest rate cuts of greater magnitude could be counterproductive for financial conditions. A persistent deterioration in the fiscal path, which may unfold in the coming months, could even remove the possibility of maintaining monetary accommodation for a prolonged period, but this is not, at the moment, our baseline scenario. 


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



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