BC highlights risk of stronger slowdown in economic activity

Despite seeing the latest results of macroeconomic indicators as expected, the Monetary Policy Committee (Copom) of the Central Bank assesses that the tightening of monetary policy and financial conditions bring greater risk of loss of the pace of economic recovery.

The information was disclosed this Tuesday (10th), in the minutes of the 244th Copom meeting, when it was decided to raise the basic interest rate to 12.75% per year.

“The Committee assessed the risks around the baseline scenario for growth in 2022 and 2023. Tightening financial conditions creates a risk of a stronger slowdown than anticipated in the quarters ahead, when its impacts tend to become more evident”, says the document.

The Copom also observed that, given the potential persistence of the inflationary process, the repricing of monetary policy in advanced countries has impacted the financial conditions of emerging countries.

The characteristics of global inflationary pressures were also highlighted, such as persistently high demand for goods and supply shocks linked to the war in Ukraine and China’s policy to combat Covid-19.

Factors that, in the BC’s view, have the potential to “generate persistent inflationary pressures in several economies”, especially in those that are further behind in the normalization of fiscal and monetary policies in the post-pandemic scenario.

“The Committee assessed that there is great uncertainty about the future behavior of commodity prices in reais, as a reflection of the war in Ukraine and the recovery of economies in the post-pandemic period. The Committee assesses that there is a possibility of reversal, even if partial, of the increase in international commodity prices in local currency”, he adds.

tightening cycle

Considering the scenarios discussed, the Committee signaled, for the next meeting, the extension of the Selic rate hike cycle, but to a lesser extent.

According to the minutes, the strategy ensures “the convergence of inflation over the relevant horizon, as well as the anchoring of longer-term expectations, while reflecting the monetary tightening already undertaken, reinforces the cautious stance of monetary policy. and highlights the uncertainty of the scenario”.

Regarding the ten consecutive hikes in the rate, the Copom noted that the tightening cycle was “quite intense and timely”, but it cannot yet be observed due to lags in monetary policy.

“The appropriate level of monetary tightening is also conditional on the current fiscal framework. The slackening of efforts for structural reforms, as well as permanent changes in the process of adjusting public accounts, could raise the economy’s neutral interest rate,” he says in the minutes.