Scope and Consequences of the Dissent in the COPOM
The statement issued after the last COPOM meeting displayed a hawkish tone in evaluating both the international and domestic scenarios, recognizing that the dynamism of activity and the labor market in Brazil is stronger than expected. In addition to this, the members unanimously stated that the current scenario, marked by unanchored inflation expectations, demands caution, justifying a slower monetary easing pace, from 0.5 p.p. to 0.25 p.p. per meeting.
Nevertheless, four of the Central Bank’s directors, all of them appointed by the present administration, voted for a 0.5 p.p. cut. The maintenance of the previous pace despite the diagnosis about the current conjuncture leaves few doubts that the Committee will adopt a more dovish stance starting in 2025, when members appointed by the government, including the Bank’s governor, will be in the majority. Despite the overall tone of the statement, the division within the Committee is raising the costs of disinflation by reducing its future credibility regarding the commitment to the inflation targets.
This will aggravate the unanchoring of expectations, contrary to the cautious tone expressed in the communiqué itself. In parallel, there is a high risk that the disastrous flooding in Rio Grande do Sul opens the way for an expansion of spending not restricted to the necessities of that state, putting even more pressure on the fiscal risk premia. In light of the current scenario, we have maintained our view that the Central Bank will undertake two more cuts of 0.25 p.p., reaching a terminal rate of 10.0%. However, we stress that the signaling of the communiqué will raise the risks of monetary policy as of 2025.
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