The dovish tone of the Brazilian central bank’s statement from yesterday’s meeting (at which the Selic rate was left at 2.00%) supports our view that the policy rate will remain at its current historic low into 2022. In contrast, most analysts and investors expect monetary tightening to start next year.
- The dovish tone of the Brazilian central bank’s statement from yesterday’s meeting (at which the Selic rate was left at 2.00%) supports our view that the policy rate will remain at its current historic low into 2022. In contrast, most analysts and investors expect monetary tightening to start next year.
- The decision to keep the Selic rate on hold at 2.00% was not in doubt. The outcome was fully priced into financial markets and was anticipated by 37 of the 38 analysts polled by Thomson Reuters (including ourselves). That brought to an end a run of nine consecutive interest rate cuts, starting in July of last year.
- Apart from the actual interest rate decision itself, the language in the accompanying statement was largely unchanged from the previous meeting in July. Perhaps of more interest is what the statement didn’t say.
- For one thing, there was no mention of the recent spike in food inflation, which is causing worries in political circles but evidently not at the central bank. That makes sense to us. After all, the weakness of core inflation is keeping headline inflation extremely low, at just 2.4% y/y in August. (See here.)
- What’s more, there was no suggestion in the statement that Copom has become more concerned about a potential loosening of the fiscal stance, which has been of increasing concern for investors over the past month or so. The statement did, admittedly, acknowledge that looser fiscal policy could raise Brazil’s neutral real interest rate and prompt a rise in the Selic rate. But the language surrounding fiscal risks was the same as in July’s statement and has made regular appearances in other Copom statements.
- Overall, the tone of the statement remained extremely dovish. Copom seems less optimistic on the prospects for the economic recovery than the government does. Of note, it stressed that the likely withdrawal of fiscal stimulus next year would act as a drag on growth. We agree with this point. (See here.)
- And Copom re-iterated its forward guidance that interest rates won’t be raised unless analysts’ inflation expectations and the central bank’s own inflation projections move close to target. Based on the forecasts in the statement, Copom is very unlikely to raise interest rates next year (inflation is seen averaging 3.0%, versus a target of 3.75%, with the Selic rate at 2.00%), although hikes seem likely in 2022.
- That supports our view that the Selic rate will remain on hold into the year after next. The large output gap, which is likely to persist for some time, should keep inflation below target over our forecast horizon. (See Chart 1.) That will put little pressure on Copom to raise rates. We suspect that concerns about the fiscal trajectory are more likely to act as a trigger for tightening (we will be writing more on this shortly).
- Our view is more dovish than that priced into financial markets. (See Chart 2.) Admittedly, there may be an upwards bias on marked-derived measures of interest rate expectations resulting from a higher term premium at longer maturities. But the central bank’s own survey of analysts points to rate hikes next year and then significant monetary tightening in 2022.
Chart 1: Consumer Prices (% y/y)
Chart 2: Selic Rate & Forecasts (%)
Sources: Refinitiv, Capital Economics
Sources: Bloomberg, Capital Economics
William Jackson, Chief Emerging Markets Economist, email@example.com