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SÃO PAULO – The Central Bank’s Monetary Policy Committee (Copom) decided on Wednesday (16) to keep the Selic at 2.00% per annum, keeping interest at the historic low. The decision was unanimous.
With that, the Central Bank interrupted a sequence of nine reductions in the basic interest rate, with a cycle of decline that began in July 2019, when it was at 6.5%. The decision was widely expected by economists, and 100% of the 31 experts consulted by Bloomberg designed the maintenance.
On the one hand, well-anchored expectations for inflation and the economy still far below their potential due to the crisis with the coronavirus pandemic corroborated the vision of keeping the base rate at historical lows, that is, at a level that continues to be very stimulating.
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However, economists no longer expected further falls in interest rates due to the growing perception of fiscal risks, in addition to being alert to the increase in wholesale inflationary pressures. The market was also pricing the Central Bank signal in the statement at the last meeting that if there were an adjustment, it would be small, leaving relatively little room for future interest rate cut decisions.
In the statement after the meeting on Wednesday, the monetary authority again mentioned the existence of a small space, if any, to cut interest rates in the future.
“Consequently, any future adjustment to the current degree of stimulus would occur with additional gradualism and will depend on the perception of the fiscal trajectory, as well as new information that changes Copom’s current assessment of forward-looking inflation,” the statement read .
In addition, it reiterated that it does not intend to reduce the degree of monetary stimulus “unless inflation expectations, as well as inflation projections in its basic scenario, are close enough to the goal” in its relevant horizon, which currently includes 2021 and , to a lesser degree, 2022.
In the statement, the Central Bank indicated that the so-called “future orientation” is conditioned to maintaining the current fiscal regime – which contemplates compliance with the spending ceiling rule – and anchoring long-term inflation expectations.
See Copom’s statement in its entirety:
At its 233rd meeting, the Monetary Policy Committee (Copom) unanimously decided to keep the Selic rate at 2.00% per annum.
The basic Copom scenario update can be described with the following observations:
In the external scenario, the resumption of activity in the main economies, although uneven between sectors, added to the moderation in the volatility of financial assets, has generated a relatively more favorable environment for emerging economies. However, there is considerable uncertainty about the evolution of this scenario, given a possible reduction in government stimuli and the evolution of the Covid-19 pandemic;
In relation to the Brazilian economic activity, recent indicators suggest a partial recovery, similar to what occurs in other economies. The sectors most directly affected by social detachment remain depressed, despite the recovery in income generated by government programs. On a prospective basis, the uncertainty about the growth rate of the economy remains higher than usual, especially for the period since the end of this year, concomitantly with the expected cooling of the effects of emergency aid;
The Committee believes that inflation should increase in the short term. This movement contributes to the temporary rise in food prices and the partial normalization of the price of some services in a context of recovery in mobility and activity levels;
The different measures of underlying inflation remain below levels compatible with the achievement of the inflation target in the relevant horizon of monetary policy;
Inflation expectations for 2020, 2021 and 2022 determined by the Focus survey are around 1.9%, 3.0% and 3.5%, respectively;
In the hybrid scenario, with a trajectory for the interest rate taken from the Focus survey and a constant exchange rate of R $ 5.30 / US $ *, Copom’s inflation projections are around 2.1% for 2020, 2.9% for 2021 and 3.3% for 2022. This scenario assumes an interest trajectory that ends 2020 at 2.00% per year and rises to 2.50% per year in 2021 and 4.50% per year in 2022; and
In the scenario with a constant interest rate of 2.00% per year and a constant exchange rate of R $ 5.30 / US $ *, inflation projections are around 2.1% for 2020, 3.0 % for 2021 and 3.8% for 2022.
The Committee highlights that, in its basic inflation scenario, risk factors persist in both directions.
On the one hand, the level of inactivity can produce a trajectory of inflation below expectations, especially when this inactivity is concentrated in the services sector. This risk is heightened if a slower reversal of the effects of the pandemic prolongs the environment of high uncertainty and greater precautionary savings.
On the other hand, fiscal policies that respond to the pandemic that worsen the country’s fiscal trajectory for a long time, or frustrations regarding the continuity of the reforms, may increase risk premiums.
In addition, the various programs for credit stimulation and income recovery, implemented to combat the pandemic, may reduce the aggregate demand less than estimated, adding an asymmetry to the balance of risks. This set of factors potentially implies an inflation trajectory higher than that projected in the relevant horizon of monetary policy.
Copom believes that persevering in the process of reforms and necessary adjustments in the Brazilian economy is essential to allow the sustainable recovery of the economy. The Committee also emphasizes that questions about the continuity of reforms and permanent changes in the process of adjusting public accounts can raise the economy’s structural interest rate.
Considering the basic scenario, the balance of risks and the wide range of information available, Copom unanimously decided to maintain the basic interest rate at 2.00% per annum.The Committee understands that this decision reflects its basic scenario and a balance of variance risks higher than usual for prospective inflation and is compatible with the convergence of inflation to the target in the relevant horizon, which includes calendar year 2021 and, to a lesser extent, 2022.
Copom understands that the economic situation continues to prescribe an extraordinarily high monetary stimulus, but acknowledges that due to prudential and financial stability issues, the remaining space for the use of monetary policy, if any, must be small. Consequently, any future adjustments to the current degree of stimulus would occur with additional gradualism and will depend on the perception of the fiscal path, as well as new information that changes Copom’s current assessment of forward-looking inflation.
In order to provide the monetary stimulus that is considered adequate to meet the inflation target, maintaining the necessary caution for prudential reasons, Copom considers it appropriate to use a “future prescription” (that is, a “future orientation”) as a political instrument. additional monetary. In this sense, and despite an asymmetry in its balance of risks, the Copom does not intend to reduce the degree of monetary stimulus, unless inflation expectations, as well as the inflation projections of its basic scenario, are close enough to the inflation target for the relevant monetary policy horizon, which currently includes calendar year 2021 and, to a lesser extent, year 2022. This intention is conditional on maintaining the current fiscal regime and anchoring long-term inflation expectations.
The following members of the Committee voted in favor of this decision: Roberto Oliveira Campos Neto (chair), Bruno Serra Fernandes, Carolina de Assis Barros, Fabio Kanczuk, Fernanda Feitosa Nechio, João Manoel Pinho de Mello, Maurício Costa de Moura, Otávio Ribeiro Damaso and Paulo Sérgio Neves de Souza.
* Amount obtained by the usual rounding procedure of the average R $ / US $ exchange rate observed in the five business days ending on the last day of the week prior to the Copom meeting.
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