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Brazil Monetary Policy December 2020

Brazil: COPOM stands pat in the last meeting of the year, removes forward guidance

At its 8–9 December meeting, the Monetary Policy Committee (COPOM) of Brazil’s Central Bank unanimously decided to leave the benchmark SELIC interest rate on hold at its historic low of 2.00%. The move was in line with market analysts’ expectations and marked the third hold in a row, following nine consecutive rate cuts since July 2019.

COPOM’s decision to stand pat came despite rising inflationary pressures. Inflation came in above expectations in November, hitting a near one-year high of 4.3%, which led the Bank to raise its forecast for December inflation to 4.2% from 3.0% previously. However, the Committee deemed this shock to prices to be transient and only slightly raised its projections for end-2021 and end-2022 to 3.3% and 3.5%, respectively, from 3.1% and 3.3% previously, in a scenario based on market expectations. Although the Bank stated that core inflation is at levels compatible with its inflation targets of 4.00%, 3.75% and 3.50% for 2020, 2021 and 2022, respectively, it struck a cautious tone and will monitor the evolution of prices carefully. Furthermore, COPOM continues to see risks to the inflation outlook in both directions: Economic slack and ongoing uncertainty could cause downward pressure, while upward pressure may stem from the prolongation of fiscal measures in response to the pandemic—which would weigh on the country’s fiscal trajectory and lead to a strong increase in the monetary base or higher taxes—coupled with setbacks to the reform agenda increasing risk premiums.

Turning to economic activity, the Bank noted that available data continues to point to an uneven recovery across sectors. Moreover, there is a particularly high level of uncertainty surrounding the economic outlook, especially for the end of this year as the effects of the emergency aid start to fade.

In its communiqué, COPOM stated that it believes the conditions for keeping the current degree of monetary stimulus—well-anchored inflation expectations, Central Bank projections below the target for the relevant monetary policy horizon, and the maintenance of the current fiscal regime—are still satisfied. However, it hinted that, due to intensifying price pressures, these conditions may no longer hold going forward. That said, this may not necessarily imply rate hikes 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:

“Overall, we expect the Copom to leave the Selic policy rate unchanged at 2.00% until 2H2021 and to then follow a gradual normalization path. However, while we expect the Copom to be patient, we also acknowledge the risk of an earlier start to the monetary normalization cycle than our current path given the current exceptionally low level of nominal and real rates and the fact that while currently anchored, inflation is often subject to large idiosyncratic shocks that can quickly change the outlook.”

Moreover, economists at HSBC noted:

“Overall, risks of higher inflation expectations, combined with the mounting fiscal risks for 2021, may eventually prompt the central bank to tighten its monetary policy stance. However, we do not expect the latter to occur anytime soon, as short-term conditions will remain supportive to keep the policy rate at current levels in the first months of 2021. Also, we think that the COPOM will opt to keep the current monetary policy stimulus until there is more certainty on the balance of risks for both growth and inflation. Hence, we think that these conditions could materialize in Q3 2021, when we expect the first hike to the Selic rate.”

The next monetary policy meeting is scheduled for 19–20 January.

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