Copom maintains interest rate at 2%
The Monetary Policy Committee (Copom) maintained on Wednesday its benchmark interest rate, Selic, at 2% for the third straight meeting. Yet the Central Bank body said that the scenario for inflation "suggests that the conditions for maintaining the forward guidance may soon no longer apply." The forward guidance is the already stated intention of not raising the Selic in the near term.
Even so, the Copom said that, in case it abandons the instrument, this would not "mechanically" imply a rate hike. The committee also removed a paragraph present in previous statements in which it said the room for new rate cuts, if existed, would be small.
"The Committee deems as adequate the current level of unusually strong monetary stimulus, which is being provided by the maintenance of the policy rate at 2.00% per year and the forward guidance," it said in statement released after the unanimous decision.
For the committee, the three conditions for maintaining the forward guidance continue being met. In the case of the first one, the market's inflation expectations and the Central Bank projections in its baseline scenario "are still below the inflation target for the relevant horizon," in spite of "having increased since the last meeting, in particular for 2021." Moreover, "the fiscal regime has not been changed" and long-term expectations "remain well anchored."
However, since the adoption of forward guidance "inflation expectations reversed their declining trend relative to the target for the relevant horizon," which includes 2021 and 2022. Another highlight is that in the next few months "the 2021 calendar-year should become less relevant than the 2022 calendar-year," which in turn has projections and expectations "around the target."
"A scenario of inflation expectations converging to the target suggests that the conditions for maintaining the forward guidance may soon no longer apply, which does not mechanically imply interest rates increases, since economic conditions still prescribe an extraordinarily strong monetary stimulus," it said.
In this case, the Copom stressed that the monetary policy will follow the inflation target framework, based on the analysis of prospective inflation and its balance of risks.
About the recent price increases, the Copom reiterated its assessment that they are temporary, although it acknowledges that the latest readings came "higher than expected" and that...
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