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Central Bank building — Foto: Jorge William/Agência O Globo
In an environment that is more uncertain than usual, the Central Bank’s Monetary Policy Committee (Copom) has chosen, in the minutes of last week’s meeting released on Tuesday, to describe in more detail how it sees this scenario, instead of signaling what its next steps could be. Even if the policymakers look to a longer horizon and adopt a cautious stance, the deterioration in the inflationary picture is likely to continue in the short term.
Last week, the Copom raised the benchmark interest rate to 12.75% per year from 11.75%. In the minutes in which it detailed the reasons for the decision, the committee invested in a section, much broader than the previous one, called “scenarios and risk analysis.” There, the Central Bank discusses risks that range from the war in Ukraine to the “Chinese policy to fight Covid-19” to the “persistently high demand for goods,” including in the United States. The policymakers also acknowledged that they discussed in the meeting “some likely explanations for the difference between the projection in its reference scenario [of the Central Bank] and the analysts’ projections” – a point that has been drawing the market’s attention for some time. Perhaps even more indicative is the fact that it has included the baseline inflation scenario in the section dealing with risks. In March, for example, this scenario was presented in the section that dealt with the economic situation. In other words: the main pillar on which the Copom relies to make its decisions about the Selic has lost reliability to some degree.
“The Committee judges that the uncertainty in its assumptions and projections is higher than usual,” it said on Tuesday regarding the baseline scenario.
In the opposite direction, the section that addresses the discussion about the conduct of monetary policy was much leaner in Tuesday’s minutes. The Copom affirmed that it opted “to signal as likely an extension of the cycle, with an adjustment of lower magnitude [than 100 basis points] in the next meeting.” But it said it decided on this signal, among other factors, since it “reinforces the cautious monetary policy stance and emphasizes the uncertain scenario.”
This does not mean that inflation will not get worse in the short term. In the Quarterly Inflation Report, a comprehensive document that details its assessment of the economic situation, the Central Bank projected that the Extended Consumer Price Index (IPCA) would be 1.02% in March – but the actual rate was higher, of 1.62%. Central Bank President Roberto Campos Neto acknowledged he was surprised by the reading.
April’s IPCA-15, a barometer for Brazil’s full month official inflation, continued to show deterioration, rising 1.73%. It was the highest level for April since 1995 and the also highest monthly rise since February 2003. As a result, the 12-month inflation rose to 12.03% in April from 10.79% in March. Besides the high readings, analysts have drawn attention to negative data, including qualitative aspects of inflation such as the diffusion index, which measures the number of products whose prices rose during the month. In Apex Capital’s calculations, the indicator reached 76% in April’s IPCA-15, the highest in almost 20 years.
To steer the Selic, Brazil’s benchmark interest rate, the monetary authority is currently aiming at 2023, for which the inflation target is 3.25%, with a tolerance interval of plus or minus 1.5 percentage points. But such a high and widespread inflation makes it difficult to bring the trajectory of prices to this target. As Valor reported Tuesday, inflation expectations have been deteriorating, both in the case of implicit projections in government bonds and in the estimates made by financial firms, consultancies and asset managers. Some firms project inflation of around 10% for this year. The Central Bank’s baseline scenario projections are 7.3% and 3.4% for 2022 and 2023, respectively. It is worth mentioning, also considering long-term inflation, the 8.87% adjustment made Monday by Petrobras in the price of diesel at the pump, which has a broad impact on the production chain.
In Tuesday’s minutes, the Copom acknowledges that the situation is serious, stating that “consumer inflation remains high, with increases spread among several components, and continues to be more persistent than anticipated.”
“Whereas inflation of services and industrial goods are still high, the recent shocks have led to a strong increase in the components associated with food and fuels. Recent readings were higher than expected, and the surprise came on both the more volatile components and the items associated with core inflation,” the Copom said. “As for the more volatile components, the increase of gasoline prices is still noteworthy, with greater and faster impact than anticipated. The inflation of the components more sensitive to the economic cycle and the monetary policy continues elevated, and the various measures of core inflation are above the range compatible with meeting the inflation target.”
The format of the minutes’ wording may have changed, in part, because of the presence of Central Bank’s new director of economic policy, Diogo Guillen, appointed at the end of April. But it is hard to deny that, in the face of such external and internal uncertainties, the monetary authority has been opting for a more cautious stance since last week. It is also clear that the inflationary environment continues to worsen in the short term.
Source: Valor International