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Brazil Monetary Policy January 2021

Brazil: COPOM on hold in January meeting

At its first meeting of 2021 on 19–20 January, the Monetary Policy Committee (COPOM) of Brazil’s Central Bank unanimously decided to keep the benchmark SELIC interest rate at its historic low of 2.00%. The move was in line with market analysts’ expectations and marked the fourth hold in a row, following nine consecutive rate cuts since July 2019.

COPOM’s decision to hold came against a backdrop of rising inflation. Price pressures have surprised on the upside lately, largely owing to the recent recovery in global commodity prices and its impact on food and fuel prices. However, the Bank deems the shock to prices to be transitory, despite having proved more resilient than expected, projecting inflation to land at 3.4% by end-2021 and 3.5% by end-2022, in a scenario based on market expectations. Meanwhile, core inflation is at levels above what is compatible with the inflation targets of 3.75% and 3.50%, for 2021 and 2022, respectively; as such, the Bank will continue to monitor the evolution of prices carefully. COPOM still sees risks to inflation in both directions, however: Downward pressure could stem from elevated uncertainty due to the pandemic and economic slack, while a potential prolongation of fiscal relief measures and setbacks to the reform agenda increasing risk premiums could cause upward pressure.

Turning to economic activity, although available data for Q4 is promising, the Bank noted that this does not account for the recent spike in new coronavirus cases. Uncertainty regarding the economic outlook continues to remain elevated, particularly for the first quarter of 2021 as the effects of the emergency aid start to fade.

In its communiqué, COPOM stated that since inflation expectations and inflation projections are close to the inflation target for the relevant monetary policy horizon, the conditions for sustaining the current degree of monetary stimulus—and thus, for keeping its forward guidance—are no longer satisfied. Going forward, monetary policy will depend on the balance of risks for inflation. However, COPOM also underscored that the removal of the forward guidance does not automatically imply a rate hike, as substantial monetary stimulus is still warranted due to the economic backdrop.

Commenting on the outlook for monetary policy, Alberto Ramos, economist at Goldman Sachs, reflected:

“In a few words, the current interest carry is way too low and therefore it would be prudent for the Copom to normalize policy a bit earlier and faster in order to protect the 2022 inflation target and hedge against a less benign balance of risks for inflation. In other words, perhaps more than inflation, it is financial risk management considerations that would justify the withdrawal of part of the current exceptional level of monetary accommodation earlier and/or faster than previously expected and beyond what the inflation and growth backdrop (as captured by a traditional Taylor Rule) would demand.”

The next monetary policy meeting is scheduled for 16–17 March.

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