The Central Bank’s Copom (Monetary Policy Committee) assessed the costs and benefits of accelerating the pace of monetary tightening, but, according to the minutes of the meeting released this Tuesday (28), concluded that the current level is “effectively contractionary” and adequate to bring inflation to the target in 2022 and 2023.
Last week, the BC raised the basic interest rate by 1 percentage point, to 6.25% per year. Accelerating the pace would be to raise the Selic rate above this level to face the escalation of prices and inflation expectations in recent months.
Faced with inflationary surprises, in which prices rise above expectations, the market has increased pressure for the BC to intensify the rate of interest rate hikes.
“The Copom assessed the costs and benefits of accelerating the rate of interest rate hike, making the following considerations. First, the adjustment cycle stage is characterized by an already effectively contractionary monetary policy, which is evidenced when observing the difference in expectations for interest rate and inflation trajectories over the relevant monetary policy horizon,” the text said.
For the Copom, the magnitude of the increase is enough to reach the inflation target for the coming years. With this, the indication is that at the next meeting, at the end of October, there will be a new increase of 1 percentage point, to 7.25% per year.
In the minutes, the monetary authority suggested that, despite maintaining the same pace, the upward cycle could be longer and end at higher levels to bring inflation to the target.
“Secondly, simulations with interest rate hikes that maintain the current pace of adjustment, but consider different terminal rates, suggest that the current pace of adjustment is sufficient to reach a significantly contractionary level and ensure convergence of inflation to the target in 2022, even considering the asymmetry in the balance of risks”, the minutes continued.
The BC also stated that it needs more information to assess economic activity and the persistence of inflationary shocks.
“Finally, the weight of volatile items in the revisions of short-term inflation projections and the unprecedented nature of the post-pandemic economic readjustment process reinforce the benefit of accumulating more information on the state of the economy and the persistence of current shocks,” he said .
According to BC’s baseline scenario, inflation projections are “slightly above” the 2022 target and around the 2023 target. The Copom reiterated that fiscal risks remain pushing expectations up.
“The Committee considered that fiscal risks continue to imply an upward bias in the projections. This asymmetry in the balance of risks affects the appropriate degree of monetary stimulus, thus justifying a trajectory for a more contractionary monetary policy than that used in the basic scenario”, highlighted.
Regarding economic activity, the BC reiterated an optimistic view and stated that, even with high-frequency data, “marginally more negative”.
“The Committee maintained the vision of a robust resumption of activity in the second half, as the effects of vaccination are felt in a more comprehensive way”, he projected.
“Copom members discussed the evolution of domestic economic activity in light of available indicators and information. The second quarter GDP result was slightly better than expected, followed by marginally more negative high-frequency releases, albeit evolving favorably,” punctuated the minutes.
In BC’s view, this occurred because part of the expected growth for the second half was anticipated and due to difficulties in the production chains.
“Part of these revisions stems from an anticipation of the expected growth for some of the sectors most affected by the pandemic; another part derives from the lower industrial production resulting from the maintenance of difficulties in the supply chains”, he highlighted.
For 2022, the Copom said that it considers that economic growth will benefit from the recovery of the labor market and the services sector, “even if to a lesser extent than previously anticipated”, by the performance of sectors less linked to the business cycle, as agriculture and livestock and extractive industry, and by remnants of the normalization process of the economy as the health crisis subsides.
In recent weeks, the market has revised downward expectations for high GDP (Gross Domestic Product) for 2022. According to the Focus survey, in which the BC releases projections from financial institutions and analysis houses, economists expect the economy grow 1.57%. Four weeks ago, the estimate was 2%.
Regarding the labor market, the Copom discussed the evolution of employment.
“The decline in the unemployment rate with the growth of the labor force and the employed population indicates that the labor market continues to recover. However, the levels of the last two variables are still considerably below those observed before the pandemic, suggesting a remaining gap in the labor market “he stated.
“Given the difference between the main employment indicators in the formal segment – PNAD Contínua and Novo Caged, the latter showing a more robust recovery than the former – the difficulty remains in assessing the effective state of the labor market”, he pondered.