Monetary Policy Committee was split in policy meeting last week between moderates and conservatives
06/28/2023
/i.s3.glbimg.com/v1/AUTH_37554604729d4b2f9f3eb9ad8a691345/internal_photos/bs/2023/A/q/GAHHFrRje7AfdNYiAEWw/103081535-mariz-pa-20brasilia-2019-05-2023-20banco-20central-economia-juros-20banco-20central-20em-20bras-c3-adlia.-20foto.jpg)
Central Bank’s building in Brasília — Foto: Cristiano Mariz/Agência O Globo
The Central Bank’s Monetary Policy Committee (Copom) was split last week between moderates, who wanted to signal the start of monetary tightening for August, and conservatives, who think it is too early for anything. But even moderates are being quite cautious: they are talking about a “parsimonious process” of change at the next meeting.
In the wording historically used by the Copom, parsimony means 25-basis-point moves in the key interest rate Selic, which currently stands at 13.75% per year. Last week’s statement referred only to “caution and parsimony,” implying that the hypothesis of a minimal rate cut applies only to the August meeting – and that the pace of rate cuts could therefore be adjusted to, say, 50-basis-point cuts at subsequent meetings.
When the moderates of the Copom speak in the minutes released Tuesday that we could have the beginning of a “parsimonious process” of policy shift, some doubts arise. Is the Copom signaling that if it begins to cut rates in August, it will continue at 25-basis-point cuts in subsequent meetings? Or will the pace of monetary easing be modest, with a 25-basis-point increase between meetings?
In the past, these keywords indicating the pace of expansion have been used in more than one way. During the Ilan Goldfajn administration, “moderate” was used both to refer to adjustments in the pace of rate cuts (for example, to 50 bp from 25 bp) and to signal a 25 bp move.
Whatever the meaning of “parsimonious process” may be, it is clear that the signaling is aimed at maintaining financial market bets on how far interest rates can fall in this initial phase of the easing cycle.
The Copom minutes show that even the moderates are very cautious about signaling rate cuts. And it is unclear whether they really believe that caution is needed – or whether this was the signal that the group thought it was possible to send at the moment, given that on the other side there is a strong group of conservatives hitting on the brakes.
The moderates had a majority and theoretically could have sent a stronger signal about what they thought was likely for the August meeting. But that signal was left out of the statement released last week. It only came out now, in the Copom minutes, in a more diluted form and somewhat weakened by the view of the conservatives of the committee. Why did the majority of the Copom give so much voice to the minority?
First, it is necessary to highlight the style of Central Bank President Roberto Campos Neto, who has always sought consensus. The search for a minimum consensus is all the more important at the present time, when the market’s inflationary expectations – both by economists and traders – remain de-anchored.
Second point: the dissidence is numerous because it seems to consist of at least three members. The Central Bank has never used the word “group” in its official documents as it does now. A two-member group is possible, but that would be a misuse of the word. So there is probably a moderate majority of five and a conservative minority of three.
It is also possible that the dissenting votes include more influential members within the Copom. These members, who, like Mr. Campos Neto, are independent directors with a term, are increasingly expressing their views in public.
Some economic analysts believe that these discussions among members are set up to signal austerity and hold the bets. In other words, they see dissent as a tool of monetary policy communication. This does not seem to be the case.
The history of the last four Copom minutes consistently shows two groups with different views coexisting, one more conservative and the other more moderate. This division can be traced back even further, to last September, when there were two votes for a residual rate hike.
Since January, this more conservative group has been hypothesizing that the neutral rate of interest (the minimum level of the Selic rate at which the economy begins to cool and inflation begins to fall) is higher than previously thought. One argument of this group is that the cooling of the economy and the decline in inflation are not occurring as expected.
At last week’s meeting, the thesis of this conservative group prevailed and the estimate for the neutral rate was revised to 4.5% per year from 4% per year. In theory, this should have calmed things down: the Copom recalculated its inflation projections to reflect the higher neutral rate. The most pessimistic scenario is in the accounts, since what was uncertainty became the central scenario of the committee.
But this is not what happened: according to the Copom’s minutes, the conservative group said, in the discussions on whether to signal an expansion for August, that “the uncertainty about the output gap [the degree of economic slack] creates doubt about the impact of the monetary tightening implemented so far.” This group also advocated the need to “accumulate more evidence of disinflation in the more cyclically sensitive components.”
Mr. Campos Neto is unlikely to abandon his style of seeking consensus, even if unanimity is not always possible. For this reason, this division within the Copom – which is likely to persist until the conservatives are no longer comfortable with the scenario of falling inflation – is expected to act as a brake not only on the decision to start cutting interest rates, but also on the signals regarding the pace of disinflation.
*Por Alex Ribeiro — São Paulo
Source: Valor International