Itaú BBA - Copom: two way risks, but no move for the time being

Macro Brazil

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Copom: two way risks, but no move for the time being

agosto 1, 2018

The Copom took the universally expected decision, leaving the base rate unchanged at 6.50% pa, without a bias, in an unanimous vote

The Copom took the universally expected decision, leaving the base rate unchanged at 6.50% pa, without a bias, in an unanimous vote. The authorities undertook the usual factual updates, noting the effects of the transportation sector disruption on activity (negative) and inflation (apparently temporary). The committee notes that the economic slack is still wide, which adds a dovish twist to the statement, but noted, too, that risks, to the inflation outlook, stemming from uncertainty on the implementation of reforms and from the external environment, remain elevated, providing balance to the message. One gets the impression that the committee does not want to fuel any discussion of short-term rate moves, be it up or down. We will learn more about the rationale for this decision with the release of the Copom minutes on Tuesday, August 7th, at 08:00am, Brasília time.

Details

In the statement, the committee evaluated that recent economic activity data reflect the effects of the truckers’ stoppage, but there is already evidence of recovery. The base-case scenario remains consistent with an ongoing activity recovery, in a more gradual pace than expected before the stoppage.

In Copom’s view, the external scenario presented some accommodation recently, but remains challenging. The risks linked to normalization of interest rates in advanced economies and uncertainty about global trade continue to translate into a lower risk appetite for emerging economies than that observed in the beginning of this year.

The Copom assesses that inflation in June reflected significant upward effects from the truckers’ stoppage and other relative price adjustments. However, recent data reinforce the view, presented by the committee in its previous meeting, that these effects should be only temporary. Measures of core inflation remain at low levels, including the components that are more sensitive to monetary policy (that is, service prices).

According to the central bank’s Focus survey, inflation expectations rose to 4.1% for 2018 (from 3.9% in the previous meeting) and remained at 4.1% for 2019 and 4.0% for 2020 and 2021. The Copom's own forecasts were broadly unchanged. In the market scenario the forecast for 2018 remained at 4.2% and rose slightly to 3.8% in 2019 (from 3.7%), assuming that the interest rate in 2018 is 6.50% and in 2019 is 8% and with the exchange rate at R$/US$ 3.70 at the end of both years. In the reference scenario, with a constant interest rate of 6.50% and exchange rate at R$/US$ 3.75 (rounded average of the five business days to the Friday before the meeting), forecasts remained the same as the previous meeting, at 4.2% for 2018 and 4.1% for 2019.

The Copom emphasized that in its base-case scenario there are both upside and downside risks. Regarding the downside risks, the text repeats that lower-than-expected inflation in the future could stem from inertial mechanisms that propagate the low level of past inflation, but adds that the still-high level of slack also contributes to this risk. The upside risks include disappointment with the reform agenda, which would affect risk premia, putting upside pressure on inflation, and the deterioration of the external scenario for emerging market economies – according to the committee, these risks remain at higher levels.

The Commitee repeated that the economic scenario calls for stimulative monetary policy, with interest rates below neutral, and highlighted that the continuity of the process of reforms and necessary adjustments is key to maintain inflation low in the medium and long terms, reduce the neutral interest rate, and contribute to a sustainable economic recovery. Relative to previous statements, the Copom added that the perception about the continuity of the reform agenda affects expectations and macro forecasts.

In short, the Copom took the universally expected decision, leaving the base rate unchanged at 6.50% pa, without a bias, in an unanimous vote. The authorities undertook the usual factual updates, noting the effects of the transportation sector disruption on activity (negative) and inflation (apparently temporary). The committee notes that the economic slack is still wide, which adds a dovish twist to the statement, but noted, too, that risks, to the inflation outlook, stemming from uncertainty on the implementation of reforms and from the external environment, remain elevated, providing balance to the message. One gets the impression that the committee does not want to fuel any discussion of short-term rate moves, be it up or down. We will learn more about the rationale for this decision with the release of the Copom minutes on Tuesday, August 7th, at 08:00am, Brasília time.



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