Itaú BBA - Copom: less asymmetric risks

Macro Brazil

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Copom: less asymmetric risks

octubre 31, 2018

The statement brings few but relevant changes, noting that risks have become less asymmetric

The Copom delivered the expected decision, leaving the base rate unchanged at 6.5% pa, in a unanimous call. The statement brings few but relevant changes compared with the previous edition. In particular, whilst keeping the message that monetary stimulus may be gradually withdrawn in case the inflation outlook and/or the balance of risks around it worsen, Copom members concede that risks have become less asymmetric, i.e. with lesser dominance of upside concerns. The authorities present a set of forecasts, in the baseline scenario, with a constant Selic rate at 6.5% pa and the exchange rate at 3.70, that is fully consistent with the targeted path: 4.4% for 2018 (against a 4.5% target), 4.2% for 2019 (vs. 4.25%), and 4.1% for 2020 (vs. 4.0%). Under these circumstances, there is apparently no case for lifting the base rate in the near term, and it should end the year at 6.5% pa. We will learn more about the Copom´s thinking with the release of the meeting minutes on Tuesday, November 6, at 08:00 Brazil time. 
 

Details

In the statement, the committee assessed that recent economic activity indicators continue to show a recovery in the Brazilian economy, at a more gradual pace than was envisaged earlier in the year.

In Copom´s view, the external scenario remains challenging, with emerging market risk appetite lower than at the beginning of the year. The main risks continue to be those associated with the normalization of interest rates in the advanced economies and uncertainties about global trade.

The committee assesses that underlying inflation measures are at appropriate levels, including those components most sensitive to the economic cycle and monetary policy.

Inflation expectations presented in the Focus survey stand at around 4.4% for 2018 and 4.2% for 2019. Expectations for 2020 and 2021 remained close to 4.0% and 3.9%, respectively. The Copom’s own forecasts in the scenario with constant interest rates at 6.50% and constant exchange rate at 3.70 BRL (average of the five working days up to the Friday that preceded the Copom meeting) remained at 4.4% for 2018 and retreated to 4.2% for 2019 (from 4.5%). In the scenario with interest and exchange rates of the Focus survey, Copom’s forecasts are 4.4% for 2018 and 4.2% for 2019. This scenario assumes interest rates that end 2018 at 6.50% and 2019 at 8.0%, and exchange rate at 3.71 BRL in 2018 and 3.80 BRL at 2019. The Copom included its forecasts for 2020 in this statement. They stand at 4.1% in the reference scenario and 3.7% in the market scenario (against 4.0% and 3.6%, respectively, in September’s inflation report).

The Copom emphasized that there are upside and downside risk factors to its central scenario. Regarding the downside risks, the ample slack in the economy may produce an inflation trend below expected. On the other hand, frustration on the expectation about the continuity of the reform agenda and necessary adjustments in the economy may affect risk premia and increase the inflation trend in the relevant monetary policy horizon. This risk intensifies in case of a deterioration of the external scenario for emerging markets. The Copom judged that these two last risks have more weight. However, it also judged that the level of asymmetry of the balance of risks declined since its last meeting.

The Copom reiterated that the economic scenario calls for stimulative monetary policy, with interest rates below the structural (or neutral) level. In addition to that, the Copom kept the indication that this stimulus may start to be gradually removed, in case the inflation scenario or its balance of risks worsen. The Copom repeated that the continuity of the reform process and necessary adjustments in the Brazilian economy is key to keep inflation low at the medium and long term scenarios.

Therefore, the Copom delivered the expected decision, leaving the base rate unchanged at 6.5% pa, in a unanimous call. The statement brings few but relevant changes compared with the previous edition. In particular, whilst keeping the message that monetary stimulus may be gradually withdrawn in case the inflation outlook and/or the balance of risks around it worsen, Copom members concede that risks have become less asymmetric, i.e. with lesser dominance of upside concerns. The authorities present a set of forecasts, in the baseline scenario, with a constant Selic rate at 6.5% pa and the exchange rate at 3.70, that is fully consistent with the targeted path: 4.4% for 2018 (against a 4.5% target), 4.2% for 2019 (vs. 4.25%), and 4.1% for 2020 (vs. 4.0%). Under these circumstances, there is apparently no case for lifting the base rate in the near term, and it should end the year at 6.5% pa. We will learn more about the Copom´s thinking with the release of the meeting minutes on Tuesday, November 6, at 08:00 Brazil time.



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