Brazil: Copom looks for freedom – Rabobank

Mauricio Oreng, Senior Brazil Strategist at Rabobank, explains that in the recently published Brazilian Central Bank (BCB) minutes from last week’s Copom policy meeting, the most important policy message (paragraph #24) was that the BCB retains degrees of freedom with a choice to give no signal about the policy steps after the next meeting.

Key Quotes

“In our view, this decision to leave doors open is a normal hedge by a central bank operating in relatively fluid circumstances (e.g. low inflation and high spare capacity on one hand, fiscal woes and delayed reforms on the other). Yet, barring for major surprises, we stick to our view that the most likely scenario is the end of the cycle in the next meeting (with a final 50-bp move, as already signalled).”

“Our scenario has it that the benchmark Selic rate will only move back up to neutral level (after a mild 100-bp hiking cycle) in 2020, given the elevated slacks present in the economy. The generalized idle capacity, as seen today, is unlikely to be substantially eroded quickly with the moderate type of recovery that we envision ahead (GDP growth at 2-3%).”

“We look for inflation settling at 4.0% for the medium run (i.e. until 2020), taking for granted the approval of key fiscal reforms no later than 2019-2020.”