Promises That Cannot Be Kept
In line with the statement released last week, when Copom announced the decision to halt the monetary easing cycle and maintain the Selic rate target at 10.50% per year, the Minutes of the meeting came out quite harsh, signaling no room for a reduction in the basic interest rate in the coming months. The diagnosis remained similar to that presented at the May meeting.
Regarding the external scenario, the Central Bank still sees turbulence, mainly related to expectations about U.S. monetary policy relative to the monetary policies of major global economies. The postponement of the interest rate reduction cycle in the U.S. and the cautious beginning of easing in the Eurozone have led to movements in the exchange rates of emerging countries and, to varying degrees, in their interest rate curves.
Although the Central Bank does not state it explicitly, Brazil does not fare well in this comparison. In the words of the Committee:
"In the current environment of lower liquidity, there is potentially greater differentiation between assets, relatively increasing the demand for safer assets or those with better fundamentals."
More relevant, however, are the domestic developments. The Central Bank highlights the stronger-than-expected performance of overall economic activity and the labor market in particular.
Aside from the surprise regarding the scenario that guided Copom until March, of moderation in the growth rate, such a revision led to two important changes.
First, the output gap estimates, which until the Inflation Report published in March pointed to a “slightly negative” value (-0.6% of GDP), were updated and now suggest a gap “around neutrality” (our evaluations suggest that the gap is already in positive territory, however).
Second, the stronger-than-expected economic activity, “primarily sustained by the labor market, social benefits, and payment of court-ordered debts”, also led the Central Bank to revise its estimate for the neutral real rate, from 4.50% to 4.75% per year (our estimate is closer to 5% per year), suggesting that monetary policy has been less contractionary than the Central Bank imagined.
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