Meeting minutes reveal a more conservative stance than initial analyst interpretation
08/07/2024
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Minutes from last week’s meeting state that Central Bank’s decision in September will depend on the economic developments until then — Foto: Divulgação/BCB
The Central Bank of Brazil’s Monetary Policy Committee (COPOM) has indicated the possibility of a rate hike at its next meeting in September, while simultaneously avoiding any premature decisions.
The minutes from last week’s meeting, released on Tuesday, state that the decision in September will depend on the economic developments until then, without committing to any future strategies.
This conditional approach suits the committee well given the unfavorable inflationary scenario observed at the meeting last Wednesday and is appropriate for handling the new situation that emerged the following day, when fears of a recession in the United States intensified.
It is unlikely that the COPOM updated its minutes to reflect recent events. The governance of drafting this document means the committee confines itself to what was discussed at the COPOM meeting. Any deviations should have been explicitly mentioned in the text.
Therefore, it is crucial to consider how the COPOM viewed the situation in the United States during its meeting. From this initial benchmark, one can follow the thread to anticipate how new developments might affect the September decision. “A scenario of gradual reduction in inflation and activity and a cautious start to monetary easing is envisaged,” the minutes state, referring to the United States.
In other words, a more substantial economic downturn in the U.S. was not anticipated by the Central Bank, nor was a more aggressive cycle of monetary easing by the Federal Reserve (Fed).
It is also essential to understand how the COPOM will digest the new developments: lower interest rates in the United States do not mechanically translate to lower rates in Brazil, nor does a weaker dollar. It will depend on how these factors affect inflation, which also depends on other variables, such as the level of economic activity and fiscal policy developments.
Overall, the minutes are more conservative than the initial interpretation of the statement made by economic analysts last week. The scenarios under consideration are clear—either maintaining or increasing interest rates from the current 10.5% per annum, depending on the situation the committee encounters in September.
The market misinterpreted the COPOM’s view on its inflation projection. It assumed that the 3.2% inflation rate for the 12 months ending March 2026 was close enough to the target to be indistinguishable. The COPOM’s minutes clearly state that the rate “is above the inflation target of 3%.” In other words, the current 10.5% interest rate no longer seems sufficient.
The market also downplayed the COPOM’s expressed concerns regarding its inflation risk balance. All members acknowledged that there are more items listed indicating the risk of inflation exceeding the target. “Several members” emphasized the asymmetry of the inflation risk balance, pointing out that upward factors outweigh downward ones.
Had nothing new occurred since last Thursday, the market’s re-pricing—assuming a more “dovish” COPOM—would have been premature. The minutes do not appear to differentiate between the chances of maintaining rates and additional tightening.
Within this more conservative message, there are some inconsistencies between the minutes and the decision to maintain rates last week. If the COPOM believes the projected inflation is above the target, why not raise rates already? There were reasons for at least a split vote, considering that “several members” view this projection with greater skepticism, noting that the chances of inflation exceeding the target are higher than those of it falling below.
The decision to maintain rates, postponing the decision on a hike until September, could reflect a committee seeking consensus in its decisions, following the scars left by its divided decision in May. Ultimately, a slower approach provides the COPOM more time to analyze a more uncertain situation with greater calm and more information.
*Por Alex Ribeiro — São Paulo
Source: Valor International