In its 229th meeting, the Copom unanimously decided to lower the Selic rate to 3.75% p.a.
The following observations provide an update of the Copom’s baseline scenario:
· Regarding the global outlook, the novel coronavirus pandemic is causing a significant global growth slowdown, a fall in commodity prices, and an increase in asset prices volatility. With this background, the environment for emerging economies has become challenging, despite the additional provision of monetary stimulus in major economies;
· Data on economic activity released since the previous meeting remains in line with the process of the gradual recovery of the Brazilian economy. However, these data do not yet reflect the impact from the COVID-19 pandemic;
· The Committee judges that various measures of underlying inflation are running at levels compatible with meeting the inflation target at the relevant horizon for monetary policy;
· Inflation expectations for 2020, 2021, and 2022 collected by the Focus survey are around 3.1%, 3.65%, and 3.5%, respectively;
· The Copom’s inflation projections in the hybrid scenario with interest rate path extracted from the Focus survey and constant exchange rate at R$4.75/US$* stand around 3.0% for 2020, and 3.6% for 2021. This scenario assumes a path for the Selic rate that ends 2020 at 3.75% p.a. and rises to 5.25% p.a. in 2021; and
· The scenario with constant interest rate at 4.25% p.a. and constant exchange rate at R$4.75/US$* yields inflation projections around 3.0% for 2020, and 3.6% for 2021.
The Committee emphasizes that risks to its baseline scenario remain in both directions.
On the one hand, economic slack may continue to produce a lower-than-expected prospective inflation trajectory. This risk increases if a worsening of the pandemic implies a larger-than-expected, both in magnitude and in length, increase in uncertainty and decline in demand.
On the other hand, the increase in monetary policy power, the deterioration of the external scenario, or the frustration with the continuation of reforms may increase the risk premium and generate a higher-than-expected path for inflation over the relevant horizon for the conduct of monetary policy.
Taking into account the baseline scenario, the balance of risks, and the broad array of available information, the Copom unanimously decided to lower the Selic rate by 0.50 percentage point to 3.75% p.a. The Committee judges that this decision reflects its baseline scenario for prospective inflation, a higher-than-usual variance in the balance of risks, and it is consistent with convergence of inflation to its target over the relevant horizon, which includes 2020 and mainly 2021.
The Copom reiterates that economic conditions prescribe stimulative monetary policy, i.e., interest rates below the structural level.
The Committee emphasizes that persevering in the process of reforms and necessary adjustments in the Brazilian economy is essential for a sustainable economic recovery. The Copom also stresses that questions about the continuation of the reform agenda and permanent changes to the fiscal consolidation process could result in a higher structural interest rate. Under such circumstances, additional monetary easing may be counterproductive and result in a tightening of financial conditions.
The Copom understands that the current environment recommends caution in the conduct of monetary policy and, at this moment, deems appropriate to keep the Selic rate at its new level. However, the Committee recognizes that the variance of its balance of risks has increased and that further economic data will be essential to determine its next steps.
The Banco Central do Brasil stresses that it will continue to deploy its arsenal of monetary, exchange rate and financial stability policies to fight the current crisis.
The following members of the Committee voted for this decision: Roberto Oliveira Campos Neto (Governor), Bruno Serra Fernandes, Carolina de Assis Barros, Fábio Kanczuk, Fernanda Feitosa Nechio, João Manoel Pinho de Mello, Maurício Costa de Moura, Otávio Ribeiro Damaso, and Paulo Sérgio Neves de Souza.
*Value obtained according to the usual procedure of rounding the average R$/US$ exchange rate observed on the five business days ending on the Friday before the Copom meeting.