BCB COPOM Minutes - Meeting 254
Central bank: bcb | Type: minutes | Date: 2023-05-02

1 bcb.gov.br
Minutes of the Meeting of the
Monetary Policy Committee — Copom
May 2-3, 2023
254th
254th Meeting
COPOM
May 2-3
2 bcb.gov.br
The Copom members analyzed the recent performance and prospects for the Brazilian and
international economies, under the monetary policy framework, whose objective is to comply with
the inflation targets established by the National Monetary Council. This document represents
Copom's best effort to provide an English version of its policy meeting minutes. In case of
inconsistency, the Portuguese version prevails.
Date:
May 2-3, 2023
Place: BCB Headquarters’ meeting rooms on the 8 th floor (5/2 and 5/3 on the morning)
and 20th floor (5/3 on the afternoon) – Brasilia – DF – Brazil
Starting and ending
times:
May 2: 10:13 AM – 12:21 PM; 2:28 PM – 6:38 PM
May 3: 10:06 AM – 11:15 PM; 2:34 PM – 6:46 PM
In attendance:
Copom Members Roberto de Oliveira Campos Neto – Governor
Diogo Abry Guillen
Fernanda Magalhães Rumenos Guardado
Maurício Costa de Moura
Otávio Ribeiro Damaso
Paulo Sérgio Neves de Souza
Renato Dias de Brito Gomes
Department Heads in
charge of technical
presentations (attending
on 5/2 and on the
morning of 5/3):
Alan da Silva Andrade Mendes – Department of Foreign Reserves
André Minella – Research Department (also present on the afternoon of 5/3)
André de Oliveira Amante – Open Market Operations Department
Fabia Aparecida de Carvalho – Department of International Affairs
Ricardo Sabbadini – Department of Economics
Rogério Antônio Lucca – Department of Banking Operations and Payments System
Other participants
(attending on 5/2 and on
the morning of 5/3):
Antônio Geraldo Filho – Head of Division at the BCB’s Internal Auditing
Arnildo da Silva Correa – Head of the Office of Economic Advisor
Cristiano de Oliveira Lopes Cozer – General Counsel
Edson Broxado de França Teixeira – Head of the Deputy Governor for Supervision’s Office
Eduardo José Araújo Lima – Head of the Deputy Governor for Economic Policy’s Office
Euler Pereira Gonçalves de Mello – Deputy Head of the Research Department
Fernando Alberto G. Sampaio de Cavalcante Rocha – Head of the Department of Statistics
Gilneu Francisco Astolfi Vivan – Head of the Financial System Monitoring Department
Isabela Ribeiro Damaso Maia – Head of the Sustainability and International Portfolio Investors
Julio Cesar Costa Pinto – Head of the Deputy Governor for Monetary Policy’s Office
Laura Soledad Cutruffo Comparini – Deputy Head of the Department of Economics
Leonardo Martins Nogueira – Executive Secretary
Luís Guilherme Siciliano Pontes – Deputy Head of the International Reserves Department
Mariane Santiago de Souza – Head of the Governor’s Office
Olavo Lins Romano Pereira – Deputy Head of the Department of International Affairs
Ricardo Eyer Harris – Head of Office of the Deputy Governor for Regulation’s Office
Ricardo Franco Moura – Head of the Prudential and Foreign Exchange Regulation Department
Ricardo José de Souza Oliveira – Coordinator at the BCB’s Internal Auditing
254th Meeting
COPOM
May 2-3
3 bcb.gov.br
A) Update of economic outlook and Copom’s scenario1
1. The global environment remains challenging. The episodes involving banks abroad
have increased the uncertainty, but with limited contagion on financial conditions so
far, requiring constant monitoring. The impact of these episodes on financial conditions
and consequently on global growth is still uncertain but has a negative bias. Major
economies have emphasized the principle of separation of objectives and instruments
in the conduct of monetary and macroprudential policies , despite incorporating the
impacts on activity in their scenarios.
2. At the same time, the central banks of major economies remain co mmitted to
bringing inflation back to its targets, in an environment in which inflation has been
resilient. Recent inflation readings from several countries point to some stabilization of
core inflation at levels above their targets and reinforce the persistent nature of the
current inflationary process. Furthermore, most monetary authorities signal a
prolonged period of high interest rates necessary to fight inflationary pressures, which
calls for greater caution in the conduct of economic policies also by emerging countries.
3. Turning to the Brazilian economy, the Committee's expected scenario of gradual
growth slowdown is still corroborated by the recent set of indicators. Some moderation
is observed in the coincident indicators of activity, as well as a sl owdown in the credit
market at the margin. The labor market, which surprised positively throughout 2022,
has shown resilience, with a net increase in job creation and relative stability in the
unemployment rate.
4. Consumer inflation remains high. The inflation of the components more sensitive to
the economic cycle and to the monetary policy, which present greater inflationary
inertia, remains above the range compatible with meeting the inflation target. Inflation
expectations for 2023 and 2024 collected by th e Focus survey have increased
marginally and are around 6.1% and 4.2%, respectively.
B) Scenarios and risk analysis
5. In the reference scenario, the interest rate path is extracted from the Focus survey,
and the exchange rate starts at USD/BRL 5.052 and evolves according to the purchasing
power parity (PPP). The Committee assumes that oil prices follow approximately the
futures market curve for the following six months and then start increasing 2% per year
onwards. Moreover, the energy flag is assume d to be “green” in December 2023 and
2024. In this scenario, Copom’s inflation projections stand at 5.8% for 2023 and 3.6%
for 2024. Inflation projections for administered prices are 10.8% for 2023 and 5.2% for
2024.
6. The Committee analyzed an alternative scenario with stable interest rates over the
entire relevant horizon. In such scenario, inflation projections stand at 5.7% for 2023
and 2.9% for 2024.
7. The neutral real interest rate is the rate in which, in the absence of impact from other
factors, the i nflation rate remains stable, and the output grows according to its
potential, reflecting productivity gains and changes in the structural fundamentals of
the economy. In assessing the factors that could lead to unfold an alternative scenario
characterized by a higher neutral interest rate, emphasis was placed on the possible
adoption of expansionary parafiscal policies, which can increase the neutral rate and
reduce the power of monetary policy, as previously remarked by the Committee. Still
regarding the debate about the current neutral interest rate in the economy, some
members raised an additional aspect, related to the recent economic data set. These
members pointed out that a scenario marked by a possible rise in neutral interest rates
1 Unless explicitly stated otherwise, this update takes into account changes that occurred since the March
Copom meeting (253rd meeting).
2 Value obtained according to the usual procedure of rounding the average USD/BRL exchange rate observed
on the five business days ending on the last day of the week before the Copom meeting.
254th Meeting
COPOM
May 2-3
4 bcb.gov.br
in major economi es, resilience in Brazilian activity, and a slow disinflationary process
could be compatible with a higher measure of neutral rate than that assumed by the
Committee. Under this argument, therefore, the current monetary tightening would
lead to a lower con tractionary impact than that implicit in the Copom's scenarios .
However, most of the committee members judged that this interpretation still seems
premature and needs further corroboration by data.
8. Regarding the global outlook , the low degree of labor mar ket slack in some
economies and a persistently high current inflation and widespread in the services
sector suggest that inflationary pressures should last longer. In this context, reducing
inflationary pressures continues to require the commitment and determination of
central banks to control inflation by maintaining the tightening of financial conditions
for a longer period. Such determination, with a likely impact upon asset prices in the
short term, coupled with a credit slowdown in major economies, contributes to a more
credible and lasting global disinflationary process.
9. Despite the limited contagion from the recent financial instability in the US banking
sector, a further tightening of credit conditions is observed in that country. Thus,
despite the reduction in the likelihood of a disruption in the credit market, a scenario
with a more restricted credit supply and, consequently, lower economic growth,
prevails. The Committee will continue to monitor this situation, analyzing possibl e
transmission channels, although the direct impact on the domestic financial system is
deemed limited. The Committee reinforces that the best contribution of monetary
policy is to fight inflationary pressures and smooth economic fluctuations, and it
emphasizes, once again, the separation of instruments between the objectives of
inflation control and financial stability.
10. Brazilian activity data point to a moderate pace of growth at the margin, with
emphasis on the support given by consumption, on the demand side, and by the
agricultural and livestock sector, on the supply side. Some members reminded that the
methodological changes in monthly activity surveys may increase uncertainty in GDP
projections and in the current assessment of activity. Copom anticipa tes a more
vigorous GDP growth in the release of the first quarter of 2023, especially due to
agricultural production, followed by moderation in economic activity in an environment
marked by resilience in the labor market . In addition, formal employment da ta
continued to reveal increase of job creation in the most recent period. Some members
noted that there is a movement towards a partial recomposition of recent losses in real
wages. This movement is expected and has been accompanied by a deceleration in
nominal gains, which is expected to intensify ahead. Finally, it was noted that the
economic growth outlook has not changed significantly in the recent period.
11. The Committee believes that the disinflation dynamics continues to be
characterized by a process with two distinct stages. In the first stage, already
completed, the speed of disinflation was greater, with a greater effect on administered
prices and an indirect effect on market prices through less inertia. In the second stage,
which has been currently observed, the speed of disinflation is slower, and core inflation
– which is more affected by the aggregate demand and the interest rate policy –
declines at a slower pace, responding to the output gap and future inflation
expectations. The most recent in flationary data support the view of a slower
disinflation process, in line with the view of an inflation driven by excess of demand,
mostly in the services segment. The Committee reaffirms that the disinflation process
at its current stage demands serenity and patience in the conduct of monetary policy to
ensure the convergence of inflation to its targets.
12. Still in the discussion about inflationary behavior, the recent benign behavior of
wholesale prices was emphasized, both for food and industrial goods, i n line with the
Committee's view. In addition, due to a comfortable water scenario for 2023, the green
energy flag is assumed for December. Moreover, seeking to avoid an excessive impact
of the assumption about energy tariff flags, which are inherently affected by a lot of
uncertainty for longer horizons, on inflation projections and with possible impacts on
254th Meeting
COPOM
May 2-3
5 bcb.gov.br
the conduct of monetary policy, it was decided to adopt the neutral flag, i.e., green flag
for December 2024, also in line with the view of most analysts outlined in the pre-
Copom questionnaire. In terms of the trajectory of consumer inflation over 2023, it
should be noted that a relevant drop is expected in the twelve-month inflation during
this second quarter, due to the base effect of the previous year . In the second half of
2023, as the twelve-month inflation no longer includes the effects of the tax measures
that reduced the price level in the third quarter of 2022 and the effects of this year's
tax measures will still be included, this inflation indicator will rise. Copom, therefore,
emphasizes that such behavior does not reflect the underlying inflationary dynamics,
nor does it change the view on future prospects.
13. Inflation expectations remain deanchored from the targets set by the National
Monetary Council , having slightly deteriorated at the margin. The Committee is
following this movement with concern and continues to assess that deanchored
expectations raise the cost of bringing inflation back to the target. It was emphasized
again that the behavior of expectations is a fundamental aspect of the inflationary
process since it serves as a guide for present and future prices and wages setting. Thus,
as expectations rise, there is a greater rise in prices in the current period and the
inflationary process is fueled by these expectations. It was also highlighted that the
anchoring of expectations is a key factor for price stability. In this context, the
Committee reinforces that decisions that induce to the reanchoring of expectations and
that raise confidence in the inflation targets would contribute to a faster and less costly
disinflation process.
14. The domestic credit granting scenario seems compatible with the curren t stage of
the monetary policy cycle, despite the persistence of a stronger decrease in the supply
of credit in specific modalities. The Committee anticipates a moderation in credit
granting over the next few months, but in line with what has been observed in previous
monetary policy tightening cycles. The Committee believes that the BCB has the
appropriate and necessary liquidity instruments, associated with macroprudential
policy, to deal with relevant frictions in the system, should they occur.
15. The Committee also discussed the impacts of the fiscal scenario on inflation and
assesses that the presentation of the fiscal framework has reduced the uncertainty
associated with extreme scenarios of public debt growth. The Committee will continue
to monitor the processing and implementation of the fiscal framework presented by
the government and under discussion in the National
Congress. Copom again
emphasized that there is no mechanical relationship between the convergence of
inflation and the approval of the fiscal framework since the inflation path is conditional
on the reaction of inflation expectations and financial conditions. The materialization
of a scenario with a solid and credible fiscal framework may lead to a more benign
disinflation process t hrough its effect on the expectations channel, by reducing
inflation expectations, uncertainty in the economy, the risk premium associated with
domestic assets and, consequently, the Committee's projections.
16. The Committee emphasizes that risks to its scena rios remain in both directions.
Among the upside risks for the inflationary scenario and inflation expectations, it should
be emphasized (i) a greater persistence of global inflationary pressures; (ii) the lingering
uncertainty about the final fiscal frame work to be approved by the National Congress
and, more relevant for monetary policy, its impacts on the expected paths of the public
debt and of inflation expectations, and on risky assets; and (iii) a larger or more
persistent deanchoring of long-term inflation expectations. Among the downside risks,
it should be noted (i) an additional reduction in the prices of international commodities
measured in local currency; (ii) a greater than projected deceleration of global economic
activity, particularly due to adverse conditions in the global financial system; and (iii) a
slowdown in domestic credit granting larger than what would be compatible with the
current stance of monetary policy.
17. On the one hand, the reinstatement of fuel taxes and, primarily, the pres entation
of a proposal for the fiscal framework have partly reduced the uncertainty arising from
254th Meeting
COPOM
May 2-3
6 bcb.gov.br
fiscal policy. On the other hand, the current scenario, characterized by a stage in which
the disinflationary process tends to be slower in an environment of d eanchored
inflation expectations, requires further attention when conducting monetary policy.
Copom emphasizes that there is no mechanical relationship between the convergence
of inflation and the approval of the fiscal framework, and judges that the deanc horing
of long-term inflation expectations raises the cost of the disinflation that is needed to
reach the targets established by the National Monetary Council. In this scenario, Copom
reaffirms its commitment to set monetary policy to meet the targets.
C) Discussion about the conduct of monetary policy conduct
18. Copom discussed the conduct of monetary policy, considering the set of projections
evaluated, as well as the balance of risks for inflation.
19. Copom started the debate by evaluating whether the previously outlined strategy
of stable interest rates would be enough to ensure the convergence of inflation
towards to its targets. To this end, the Committee has continued its process of analyzing
the main determinants of the inflation path and how they have behaved in the most
recent period. No significant change occurred in the prospective scenario for the output
gap. As for services inflation and measures of core inflation , increased resilience and
lower speed are observed in the recent releases, in line with the non -linear process
already anticipated by Copom. In addition, inflation expectations remain deanchored,
partially related to the questioning about a possible change in future inflation targets.
20. Copom's inflation projections have remained relatively st able since the previous
meeting. Finally, in the balance of risks, besides the factors already mentioned, the
Committee evaluates that the probability of the most extreme scenarios for the public
debt trajectory has reduced, but also noted that there was no relevant change in the
inflation projections since expectations did not change significantly. This behavior
reinforces the understanding that there is no mechanical relationship between
monetary policy and the fiscal framework. Copom emphasized that the conduct of
monetary policy, at this moment, requires serenity and patience to incorporate the
inherent delays in the inflation control through interest rates and, therefore, to reach
the goals in the relevant monetary policy horizon. Therefore, the Committee assessed
that the scenarios that could require a resumption of the monetary policy tightening
cycle have become less likely.
D) Monetary policy decision
21. Considering the assessed scenarios, the b alance of risks, and the broad array of
available information, Copom decided to maintain the Selic rate at 13.75% p.a. The
Committee judges that this decision is consistent with the strategy for inflation
convergence to a level around its target throughout the relevant horizon for monetary
policy, which includes the year of 2024. Without compromising its fundamental
objective of ensuring price stability, this decision also implies smoothing economic
fluctuations and fostering full employment.
22. Taking into ac count the uncertainty of the scenarios, the Committee remains
vigilant, assessing if the strategy of maintaining the Selic rate for a long period will be
enough to ensure the convergence of inflation. The Committee emphasizes that it will
persist until the disinflationary process consolidates and inflation expectations anchor
around its targets. The Committee judges that the current scenario demands patience
and serenity in the conduct of monetary policy. Copom emphasizes that, although a less
likely scenario, it will not hesitate to resume the tightening cycle if the disinflationary
process does not proceed as expected.
23. The following members of the Committee voted for this decision: Roberto de
Oliveira Campos Neto (Governor), Diogo Abry Guillen, Fernanda Magalhães Rumenos
Guardado, Maurício Costa de Moura, Otávio Ribeiro Damaso, Paulo Sérgio Neves de
Souza, and Renato Dias de Brito Gomes.