Banco Central do Brasil kept its benchmark interest rate unchanged for the sixth consecutive meeting in February 2023, in line with market expectations. This was the bank’s first monetary policy meeting after the new government proposed its long-awaited new fiscal rules. The board said it is “less likely” to resume hikes saying they decided to maintain its strategy for a longer period to ensure the convergence of inflation, while won’t hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected. The Brazil decision came just hours after the US Federal Reserve delivered its increase of 25 basis points to interest rates.
The board repeated that global activity and inflation remain resilient and the monetary tightening continues to advance in major economies.
The Central Bank last year aggressively hiked its benchmark interest rate with twelve consecutive interest rate hikes since 2021 when the bank began its current tightening cycle early last year, the Selic was at a record low 2%. The lending rate is now at its highest level since 2017.
Annual inflation eased to 4.65% in March from 5.6% in February 2023, while the bank’s Inflation expectations for 2023 and 2024 stand at 5.8% and 3.6%, respectively.
Highlights
- The bank held the Selic at 13.75% late on Wednesday, holding a monetary tightening cycle that’s increased borrowing costs by 11.75 percentage points since March 2021.
- Result was a unanimous decision.
- The move was expected.
- Third scheduled policy meeting after the election of leftist Luiz Inacio Lula da Silva as President
- Inflation expectations for 2023 and 2024 stand at 5.8% and 3.6%, respectively.
Banco Central Do Brasil Comitê de Política Monetária (Copom)
Monetary Policy Statement May 3, 2023
Copom left the Selic rate to 13.75% p.a.
In its 254h meeting, the Copom decided to maintain the Selic rate at 13.75% p.a.
The following observations provide an update of the Copom’s scenario:
The global environment remains challenging. The episodes involving banks abroad have increased the uncertainty, but with limited contagion on financial conditions so far, requiring constant monitoring. At the same time, the central banks of major economies remain committed to bringing inflation back to its targets, in an environment in which inflation has been resilient.
Regarding the domestic scenario, the recent set of indicators of activity continues to be in line with the deceleration expected by Copom, although with more resilience observed in the labor market. Consumer inflation as well as the various measures of underlying inflation are above the range compatible with meeting the inflation target. Inflation expectations for 2023 and 2024 collected by the Focus survey have increased marginally and are around 6.1% and 4.2%, respectively.
Copom’s inflation projections in the reference scenario* stand at 5.8% for 2023 and 3.6% for 2024. Inflation projections for administered prices are 10.8% for 2023 and 5.2% for 2024. In an alternative scenario, with a constant interest rate throughout the relevant horizon, inflation projections stand at 5.7% and 2.9% for 2023 and 2024, respectively.
The Committee emphasizes that risks to its scenarios remain in both directions. Among the upside risks for the inflationary scenario and inflation expectations, it should be emphasized (i) a greater persistence of global inflationary pressures; (ii) the lingering uncertainty about the final fiscal framework to be approved by the National Congress and, more relevant for monetary policy, its impacts on the expected paths of the public debt and of inflation expectations, and on risky assets; and (iii) a larger or more persistent deanchoring of long-term inflation expectations. Among the downside risks, it should be noted (i) an additional reduction in the prices of international commodities measured in local currency; (ii) a greater than projected deceleration of global economic activity, particularly due to adverse conditions in the global financial system; and (iii) a slowdown in domestic credit concession larger than what would be compatible with the current stance of monetary policy.
On the one hand, the reinstatement of fuel taxes and, primarily, the presentation of a proposal for the fiscal framework have partly reduced the uncertainty arising from fiscal policy. On the other hand, the current scenario, characterized by a stage in which the disinflationary process tends to be slower in an environment of deanchored inflation expectations, requires further attention when conducting monetary policy. Copom emphasizes that there is no mechanical relationship between the convergence of inflation and the fiscal framework, and judges that the deanchoring of long-term inflation expectations raises the cost of the disinflation that is needed to reach the targets established by the National Monetary Council. In this scenario, Copom reaffirms its commitment to set monetary policy to meet the targets.
Considering the assessed scenarios, the balance of risks, and the broad array of available information, Copom decided to maintain the Selic rate at 13.75% p.a. The Committee judges that this decision is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon for monetary policy, which includes the year of 2024. Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing economic fluctuations and fostering full employment.
Taking into account the uncertainty of the scenarios, the Committee remains vigilant, assessing if the strategy of maintaining the Selic rate for a long period will be enough to ensure the convergence of inflation. The Committee emphasizes that it will persist until the disinflationary process consolidates and inflation expectations anchor around its targets. The Committee judges that the current scenario demands patience and serenity in the conduct of monetary policy. Copom emphasizes that, although a less likely scenario, it will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected.
The following members of the Committee voted for this decision: Roberto de Oliveira Campos Neto (Governor), Diogo Abry Guillen, Fernanda Magalhães Rumenos Guardado, Maurício Costa de Moura, Otávio Ribeiro Damaso, Paulo Sérgio Neves de Souza and Renato Dias de Brito Gomes.
- In the reference scenario, the interest rate path is extracted from the Focus survey, and the exchange rate starts at USD/BRL 5.05 and evolves according to the purchasing power parity (PPP). The Committee assumes that oil prices follow approximately the futures market curve for the following six months and then start increasing 2% per year onwards. Moreover, the energy flag is assumed to be “green” in December 2023 and 2024. The value for the exchange rate is obtained according to the usual procedure of rounding the average USD/BRL exchange rate observed on the five business days ending on the last day of the week before the Copom meeting.
Source: Banco Central Do Brasil
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