Copom Minutes reinforce BC’s tone of caution on interest rates, economists assess

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The minutes of the Monetary Policy Committee (Copom), of the Central Bank of Brazil, brought lower expectations for the IPCA this year, 5.8% compared to 6.8% at the last meeting. Despite the positive review, economists told the CNN Brasil Business that the group maintained a tougher tone regarding inflation converging with the target set in 2024.

For Rafaela Vitória, Inter’s chief economist, the minutes released this Tuesday (27) reinforced the tone of caution BC in relation to the risks of the scenario for inflation. According to her, even with the activity stronger than expected, the committee points out that measures of idleness in the economy have high uncertainty.

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“In an alternative scenario of lower estimated idleness, the impact on inflation projections would still be small, indicating the results in the minutes. On the other hand, the Copom recognizes that the increase in interest rates throughout the cycle was significant and the lag is longer, that is, the economy will still feel the impact of the monetary policy restriction, hence the importance of the pause at this moment” , highlighted.

The Copom chose to maintain the Selic rate at 13.75% at the last meeting, but the decision was not unanimous, with two members defending the increase in the basic rate by 0.25 percentage point.

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Étore Sanchez, chief economist at Ativa Investimentos, said that the discussion for raising interest rates was intense, and the BC highlighted in the communiqué an asymmetry in favor of the resumption of interest rate hikes, mainly due to the emphasis given to the opinion of dissidents.

“If there is no relief in expectations, the authority will not shy away from resuming the cycle of high interest rates. In other words, if disinflation does not consolidate as expected, the authority will raise interest rates again”, stressed the economist.

“We believe that despite the marginally hawkish (harder) of the authority, the communication seeks to remove scenarios with early interest rate cuts”, he added.

According to the economist, the Copom statement did not change the forecast for the Selic maintenance asset at 13.75% until May 2023, when the downward cycle should begin. This is the same view as XP, which believes that until the middle of next year the basic interest rate should remain unchanged.

“We believe that global disinflation in 2023 will help the Copom bring inflation to the target path by 2024, making room for some monetary easing. But not before the middle of next year”, said Caio Megale, chief economist at XP.

In Megale’s view, the Copom made it clear that the current discussion focuses on assessing the monetary stance, whether it is tight enough.

“If necessary, the Copom can resume the hike in rates or keep the Selic at current levels for longer than expected by market analysts,” he said.

The economist said that the dynamics of services inflation, IPCA expectations for 2023 and 2024 and uncertain domestic fiscal prospects, which could become a source of additional inflationary pressures ahead, could weigh on the next Copom decisions.

On the other hand, the chief economist at Neo Investimentos, Luciano Sobral, declared that he believes that an increase in interest rates would only occur with a “big” change in the scenario, with the IPCA projected for 2023 close to 6%.

“The base case follows the Selic stop for several months. We believe that there will only be room for interest rate drops in the second half of next year, despite part of the market pricing cuts in the first quarter, with inflation already close to the target at the beginning of 2024”, he pointed out.

Source: CNN Brasil

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