banco-central-do-Brazil

Copom lowers Selic rate to 4.25% p.a.

In its 228th meeting, the Copom unanimously decided to lower the Selic rate to 4.25% p.a.

The following observations provide an update of the Copom’s baseline scenario:

Data on economic activity released since the previous meeting indicate the continuation of the process of gradual economic recovery;

Regarding the global outlook, despite the recent increase in uncertainty, the provision of monetary stimulus in major economies has been able to generate relatively favorable environment for emerging economies;

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 3.4%, 3.75%, 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$4.25/US$* stand around 3.5% for 2020, and 3.7% for 2021. This scenario assumes a path for the Selic rate that ends 2020 at 4.25% p.a. and rises to 6.00% p.a. in 2021; and

The scenario with constant interest rate at 4.50% p.a. and constant exchange rate at R$4.25/US$* yields inflation projections around 3.5% for 2020, and 3.8% for 2021.

The Committee emphasizes that risks to its baseline scenario remain in both directions. On the one hand, (i) the high level of economic slack may continue to produce a lower-than-expected prospective inflation trajectory. On the other hand, (ii) the current degree of monetary stimulus, which affects the economy with lags, may produce a higher-than-expected path for inflation over the relevant horizon for the conduct of monetary policy. Risk (ii) intensifies in case of (iii) an increase in the monetary policy power due to the changes in credit and capital markets, (iv) a deterioration of the outlook for emerging economies, or (v) a possible frustration with the continuation of reforms and the perseverance in the necessary adjustments in the Brazilian economy.

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 to 4.25% p.a. The Committee judges that this decision reflects its baseline scenario for prospective inflation and the associated balance of risks, and it is consistent with convergence of inflation to its target over the relevant horizon for the conduct of monetary policy, which includes 2020 and, with increasing weight, 2021.

The Copom reiterates that economic conditions prescribe stimulative monetary policy, i.e., interest rates below the structural level.

The Copom sees progress in the process of reforms and necessary adjustments in the Brazilian economy. The Committee emphasizes that persevering in this process is essential to allow for the consolidation of the reduction of the structural interest rate and for a sustainable economic recovery. The Copom stresses that the perception of the continuation of the reform agenda affects current expectations and macroeconomic projections.

The Copom judges that the current stage of the business cycle recommends caution in the conduct of monetary policy. In light of the lagged effects of the monetary easing cycle that began in July 2019, the Committee deems appropriate to interrupt the monetary easing process. The Committee emphasizes that its next steps will continue to depend on the evolution of economic activity, the balance of risks, and inflation projections and expectations, with increasing weight for 2021.

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.