Lost Horizon
The Minutes of the last Copom meeting maintained, or rather deepened, the tough tone already displayed in the statement following the meeting in which the Committee decided to maintain the interest rate at 10.50%, to such an extent that it seems like a document explaining why it would have raised the Selic rate last week.
Among several new points, which we will explore throughout this report, the highlight is the warning in paragraph 25, where the Central Bank outlines its alternatives for dealing with the challenging inflation scenario, marked by the rise in its projections within the relevant horizon:
“On one hand, the strategy of maintaining the interest rate for a sufficiently long time to bring inflation to the target over the relevant horizon; on the other hand, Copom unanimously reinforced that it will not hesitate to raise the interest rate to ensure inflation convergence to the target if it deems it appropriate.” [our emphasis]
The first alternative still seems to us not only the most likely but also favored by the Central Bank, despite the heavy rhetoric. As we will argue, if the scenario does not worsen significantly until the next Copom meeting (more details ahead), pushing inflation forecasts to levels incompatible with the target, the Central Bank will probably opt to extend the convergence period to the target further, particularly taking advantage of the possibility of moving the relevant horizon three months ahead after September.
Now read on...
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