Brazil: COPOM on hold for first time in over a year in September
September 16, 2020
At its 15–16 September meeting, the Monetary Policy Committee (COPOM) of Brazil’s Central Bank unanimously voted to leave the benchmark SLEIC interest rate unchanged at its historic low of 2.00%. The move was in line with market expectations and came after nine consecutive rate cuts since July 2019.
The Bank’s decision came against a backdrop of firming price pressures. The Committee raised its inflation projection for the end of this year to 1.9% from 1.6% previously due to higher food price pressures and a recovery in activity, while it kept its forecast for end-2021 at 3.0%, in a scenario based on market expectations. However, these estimates are still notably below the Bank’s target of 4.0% and 3.75% for 2020 and 2021, respectively. Meanwhile, the Committee continues to see risks to the outlook in both directions: Economic slack and a prolonged environment of uncertainty could exert downward pressure, whereas upward price pressures could arise from the government’s fiscal response to the pandemic and setbacks to the reform agenda increasing risk premiums. Moreover, credit stimulus and cash transfer programs could cause a smaller-than-estimated decline in aggregate demand, which could lead to higher-than-projected inflation.
Turning to the economy, the Bank noted that it seems to be partially recovering from the fallout caused by the Covid-19 pandemic. Available data for the third quarter suggests a revival of activity and firming demand; however, activity in the sectors most affected by social distancing measures remains subdued, despite the offsetting effects of government stimulus. As such, there is a high level of uncertainty with regard to the economic outlook, especially for the end of this year when the effects of the emergency stimulus start to wear off.
Looking ahead, the Bank stated in its communiqué that, although the economic environment still calls for strong monetary stimulus, the space for additional policy easing is narrow due to prudential and fiscal stability reasons. Thus, in terms of forward guidance, COPOM does not intend to lower the degree of monetary stimulus until the inflation projections of its baseline scenario are close enough to the target for the relevant monetary policy horizon, which is currently concentrated on 2021. This depends on the fiscal trajectory as well as potential changes to the inflation outlook.
Commenting on the outlook for monetary policy, Alberto Ramos, economist at Goldman Sachs, reflected:
“Overall, we expect the Copom to leave the Selic policy rate unchanged at 2.00% until at least 2H2021. […] Holding the policy rate at 2.00% is warranted given: lingering concerns with regard to FX dynamics/volatility and capital account flows, portfolio pressures among fixed-income funds, unaddressed significant medium-term fiscal risks, highly and increasingly expansionary short-term fiscal stance, unprecedentedly accommodative monetary policy stance, and, last but not least, the fact that the economy is responding well to the fiscal-monetary-credit stimulus already delivered. [.. ] Beyond the next few meetings, the policy rate path is likely to be significantly influenced by the budgetary and fiscal reform dynamics.”
The monetary policy meeting is scheduled for 27–28 October.
Author: Hanna Andersson, Economist