Copom Minutes: Analysts see BC more realistic and “hawkish” due to persistent inflation

Economists believe that the Central Bank adopted a more realistic and “hawkish” tone (a tougher stance to fight inflation) in the minutes of the Monetary Policy Committee (Copom) released this Tuesday (21), due to a rise in prices more persistent not only in Brazil but throughout the world. In the document, the monetary authority admitted that inflation should not converge to the center of the target in 2023, despite the extension of the cycle of high interest rates, and said that the Selic will need to rise more and remain at a higher level for longer. to fight inflation.

The BC had been indicating in recent months that it intended to end the cycle of interest rate hikes at last week’s Copom, with the Selic at 13.25% per year, but already admitted in the statement released after last week’s meeting that it should increase the rate. by another 0.5 or 0.25 percentage point at the next meeting, in early August. Now, with the Copom minutes, analysts are practically unanimous in predicting that the readjustment will be 0.5 pp – and some are betting on another increase in September.

For Laiz Carvalho, economist for Brazil at BNP Paribas, “compared to the press release, the minutes had a slightly more hawkish tone. “It is a BC that has shown itself to be a little more concerned about inflation and the worsening of the global scenario, committing itself to doing more – and what is necessary – to bring inflation to the target”. Carvalho predicts another rise of 0.5 pp in August and another in September, taking the Selic to 14.25% per year, and that interest rates will only start to fall in the second quarter of 2023, until reaching 10.5% at the end of next year.

Caio Megale, chief economist at XP, believes that the Copom minutes “describe a challenging inflation scenario that convinced the committee of the need for a higher terminal Selic rate (in addition to maintaining high interest rates for a long period)” . “On fiscal policy, the minutes reinforce the message of the post-decision communiqué, that uncertainties about the future of the country’s public accounts and policies to sustain aggregate demand can bring upward risks to the inflationary scenario. And that the fiscal measures in Congress would increase the inflation expectation for 2023”.

For Megale, “another ‘hawkish’ part of the minutes is that the Copom made clear its intention to reduce its 2023 inflation projection (IPCA) from 4% to ‘around the target’”. “We think this is important because, in the post-meeting statement, the Copom seemed to consider that 4% would already be ‘around the target’.

“Given this challenging scenario, the committee recognized that maintaining the Selic rate for a sufficiently long period would not, at this moment, ensure the convergence of inflation to around the target in the relevant horizon of monetary policy”, highlights the chief economist at XP. . “In other words, the initial plan to stop the process of raising the basic interest rate did not last long. This is consistent with our scenario of an additional 0.50 pp rise at the Copom meeting in August, before a long ‘wait and see’ period.”

More neutral than ‘hawkish’

For BofA (Bank of America Merrill Lynch) and Goldman Sachs, the tone adopted in the Copom minutes was more neutral than “hawkish”. David Beker, an analyst at BofA, says that the document “gives a neutral message”, “brought no surprises” and had “similar language” to the statement released after the Copom last week, which decided to raise the Selic by 0.5 point .

Beker lists, among the key points of the minutes, that:

  • The global environment continued to deteriorate, increasing inflationary pressure
  • Uncertainties are above normal and have increased since the last meeting, including the trajectory of commodity prices
  • Uncertainty over the fiscal outlook could bring upside risks to inflation expectations, despite a possible reduction in inflation this year with tax cuts.
  • The BC’s intention to bring projected inflation to a level close to the target and the signal that it will keep the interest rate in contractionary territory for a longer period

“The committee noted the need for higher rates for a longer period to allow inflation to converge,” says the BofA analyst. “The message is consistent with our terminal Selic ‘call’ at 13.75%, after rising 50 bps in August”. Like BNP Paribas, the bank also projects an interest rate of 10.5% per annum at the end of 2023.

Étore Sanchez, chief economist at Ativa Investimentos, says that “at first glance, our reading pointed to a ‘hawkish’ minutes”. “But after re-reading it a few times, I found the communication to be between neutral and ‘hawkish’”. He points out the part of the upward risk asymmetry, attributed to inflation and the fiscal, as a harsher tone, and the part in which the BC says that the new interest rate path is sufficient for inflation convergence to be more neutral.

“In other words, the trajectory of the Focus Bulletin for the Selic, of 13.25% at the end of 2022 and 10.00% at the end of 2023, is insufficient for convergence, but raising the interest rate to 13.50% or 13 75% and keeping it at that level for longer is enough”, says Sanchez. “At the end of the day, we maintain our perspective that interest rates should be raised by 50bps at the next meeting, a level that should be sustained until the second quarter of 2023, being gradually reduced throughout that year and ending the next year at 10.25 %”.

Part ‘hawkish’ part ‘dovish’

Goldman Sachs analysis says that the Central Bank “is playing for granted while remaining conservative” and highlights paragraph 16 as a “hawkish” point in the minutes, in which “the Copom highlights that the trajectory necessary to bring the projected inflation from 4, 0% to end of 2023 around target [3,25%] for the relevant horizon, it combines, on the one hand, a terminal interest rate higher than that used in the reference scenario and, on the other hand, the maintenance of the interest rate in a significantly contractionary territory for a period longer than that foreseen in the reference scenario”.

“In addition, in paragraph 18, the Copom highlighted that, given the persistence of recent shocks, only the maintenance of the Selic rate [em 13,25%] for a sufficiently long period would not, at this time, guarantee the convergence of inflation to the target over the relevant horizon”, writes analyst Alberto Ramos.

He also points out that the BC does not say whether the next Copom meeting will end the cycle of high interest rates, “but warned that, given the growing uncertainty surrounding the macro scenario, together with the advanced stage of the cycle and the impact yet to be observed from the recent tightening (lagged effect), additional caution is needed in calibrating upcoming monetary policy decisions”.

Goldman Sachs also projects a rise of 0.5 pp at the next meeting and does not rule out “an extension of the bull cycle beyond August if the inflation dynamics proves to be more persistent than expected in the Copom base scenario and forecasts”. of inflation for 2023 and 2024 to advance even further”. The bank believes that the monetary authority will wait until the end of the second quarter of 2023 (or possibly the third quarter) to start reducing the Selic.

As a “dovish” point (less tough on fighting inflation) of the minutes, Ramos highlights that the Copom base scenario projects an inflation of 2.7% in 2024, below the center of the target for the year (which is 3%). . He points out that the projection is “not as low as in the March Inflation Report”, but the year 2024 “will have an incremental weight in the relevant horizon of the Copom for monetary policy”.

“In our assessment, given that the monetary policy stance is already highly restrictive, we are now entering a stage of end-of-cycle fine-tuning. We understand that, at this juncture, more than a significant additional tightening, what will be needed going forward is perseverance and determination. A determination to maintain a restrictive policy stance for as long as necessary,” writes the Goldman Sachs analyst.

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