Analysis: Central Bank simply signals partial withdraw of stimulus
The minutes of the Central Bank's Monetary Policy Committee (Copom) released on Tuesday are more conservative than many analysts expected, and are likely to encourage bets on a stronger rise in interest rates than simply a partial withdrawal of stimulus. But is this really the message of the document? Apparently not.
The Copom says it has been surprised by the recent performance of the economy and is confident of a continued recovery in activity in the second half, after the impact of the new wave of the pandemic has passed. It also cites risks to the evolution of price indexes, such as fiscal policy and the chances of high current inflation affecting long-term expectations.
But all these factors were evaluated in the baseline scenario and in the balance of risks used in the Copom's decision last week. The decision can be divided into two. First, to withdraw the extraordinary stimulus, which means bringing the interest rate back to pre-pandemic levels. Second, to act in a "swifter" manner.
What could make the committee change the plan, in particular the signaling of a 75 basis points hike in May? The minutes themselves answer: "The Copom reinforced that its views for the next meeting may be altered if there is a significant change in the inflation projections or the balance of risks."
Thus, despite having exaggerated when describing the activity and inflationary picture, the Copom set a relatively high parameter to do more than signaled: it needs a "significant" worsening in projections and balance of risks.
An interesting point is that, in the minutes, the Copom treats a more accelerated increase in interest rates than that foreseen in the baseline inflation projection scenario as an increase in the "degree of monetary stimulus." The degree of stimulus is not only given by the level of the Selic rate, but also by how long it remains at this level.
The committee's description of the economic activity draws attention. This is the point on which the Copom is under more pressure from specialists. Some say the Copom is not optimizing its loss function by giving a disproportionately stronger weight to inflation than to economic activity.
In the minutes, the Copom says that the recovery of the economy has surprised, highlighting last year's GDP. In fact, the indicator was less bad than expected, closing 2020 with a drop of 4.1%, compared to a contraction of 4.4% estimated by the monetary authority.
It should be noted that the data refers to the...
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