Despite few changes from its previous communication, the minutes of last week’s meeting of the Central Bank’s Monetary Policy Committee (Copom) reinforced the market’s view that policymakers are closely watching the slowdown in economic activity and developments in credit.

The document also kept alive expectations that the benchmark Selic rate could be cut at least once more in November, although market pricing stops short of fully factoring in another reduction amid uncertainty surrounding the presidential election.

Compared with the August minutes, Copom made no significant changes to its discussion of how monetary policy should be conducted. Investors, however, saw meaningful shifts in its assessment of the economic outlook and balance of risks.

The Central Bank placed greater emphasis on slowing activity, a view reinforced by second-quarter gross domestic product data, which “confirmed the slowdown” and “revealed that the movement was more intense in economic activities and demand components that are more sensitive to the economic cycle.”

Credit conditions also returned to the minutes after being absent from the previous document. Copom said developments in bank lending have been “consistent with a slowdown in growth,” while longer-term credit categories have declined.

Short-term and emergency credit lines, which tend to be more expensive, “continued to grow, although at a slower pace at the margin,” the minutes said.

Although investors read the document as more dovish, given Copom’s assessment of the economy, interest-rate futures were volatile and ended the Tuesday (Sept. 22) session little changed. The January 2028 DI (Interbank Deposit) futures rate fell to 13.48% from a previous settlement of 13.53%.

In the options market, the implied probability of another 25-basis-point Selic cut in November remained at 67%.

Signs of restraint

PicPay has long expected the Selic rate to fall to 13.5%. The bank’s chief economist, Ariane Benedito, said the minutes reinforced the impression that the Central Bank is “very comfortable” with the rate cut already delivered and consolidated the view that the monetary easing process is “advanced and effective.”

Benedito said Copom also appeared more at ease with signs that the economy is losing momentum.

“In the more cyclical segments, it made clear that the latest indicators point to a slowdown and that GDP confirmed this trend. It also mentions longer-term credit and makes clear that it is already seeing the effects of tight monetary policy in the composition of longer-term lending,” she said.

“Despite that, there is no stronger signal,” Benedito said. She added that the Central Bank appears concerned about the risk premiums demanded by investors, particularly as anxiety builds ahead of the presidential election.

“We expect normal volatility. Of course, the market will move a lot and issues such as confidence and candidates’ proposals will come into play… But given external and liquidity conditions, as long as there is no major disruption in financial markets, investors tend over time to return their focus to the current data.”

Monte Bravo chief economist, Raí Chicoli, said the credit discussion added to the minutes did not point to an extreme scenario as the most likely outcome, but he is increasingly concerned about high household delinquency rates.

Chicoli said the Monetary Policy Report, due Thursday (Sept. 24), should provide more detail on households’ debt-service burden and overall indebtedness.

External risks

As a counterweight to a domestic backdrop that could support further Selic cuts, the minutes described the global environment as uncertain and highlighted risks stemming from higher oil prices and monetary policy in advanced economies.

Chicoli, however, does not see the external backdrop as the main driver of Copom’s next moves unless the war in the Middle East either ends or escalates significantly over the coming months.

He said economic activity and investors’ assessment of fiscal policy after the election are likely to shape the Selic’s near-term path. Chicoli does not rule out a faster pace of easing if the post-election environment becomes significantly more favorable, but for now expects two more 25-basis-point cuts this year.

Election uncertainty

Bank of America economists led by David Beker, head of Brazil economics and Latin America strategy, said the election adds uncertainty to the November meeting.

“By the next Copom meeting, Brazil’s new president will already have been elected. Regardless of the election outcome, we believe there is room for interest-rate cuts to continue. Still, if there is a significant currency depreciation after the election, the cutting cycle could be shallower than we currently expect,” the team said.

J.P. Morgan’s Brazil economists, led by Vinicius Moreira, said the minutes reinforced the Central Bank’s emphasis on a data-dependent approach. Based on the bank’s inflation and activity forecasts, they continue to expect the Selic to remain at 13.75% as their base case.

“Furthermore, consensus inflation expectations are further from the target than when the Central Bank began the calibration cycle and, according to the Central Bank’s own model, inflation does not converge to the target at least until the first quarter of 2028 in a scenario in which the Selic remains unchanged through the end of the year.”

However, the J.P. Morgan economists acknowledged downside risks to their interest-rate forecast.

“Recent activity data have generally come in below expectations, and the medium-term growth outlook has deteriorated, partly because of the high cost of debt service across much of the economy. In addition, although inflation remains persistently above target, it has been surprising to the downside.”

*By  Gabriel Caldeira,Victor Rezende and Hamilton Ferrari— São Paulo and Brasília

Source: Valor International

https://valorinternational.globo.com/