BCB COPOM Minutes - Meeting 226
Central bank: bcb | Type: minutes | Date: 2019-10-29

Minutes of the 226th Meeting of the
October 29-30, 2019
* The Monetary Policy Committee of the Banco Central do Brasil is herein referred to as the
“Copom” and the “Committee”.
** These minutes represent Copom's best effort to provide an English version of the minutes of its
policy meeting. In case of any inconsistency, the original version in Portuguese prevails
Date: October 29-30, 2019
Place: BCB Headquarters’ meeting rooms on the 8 th floor (October 29) and 20 th floor (October 30) –
Brasilia – DF – Brazil
Starting and ending times: October 29 10:03 AM – 12:58 PM; 2:38 PM – 6:13 PM
October 30 2:00 PM – 6:06 PM
In attendance:
Members of the Copom
Roberto Oliveira Campos Neto – Governor
Bruno Serra Fernandes
Carolina de Assis Barros
Fernanda Feitosa Nechio
João Manoel Pinho de Mello
Maurício Costa de Moura
Otávio Ribeiro Damaso
Paulo Sérgio Neves de Souza
Department Heads in charge of technical presentations (present on October 29)
Alan da Silva Andrade Mendes - Department of Foreign Reserves
André Minella - Research Department (also present on October 30)
André de Oliveira Amante – Department of Open Market Operations
Flávio Túlio Vilela – Department of Banking Operations and Payments System
João Barata Ribeiro Blanco Barroso – Department of International Affairs
Tulio José Lenti Maciel – Department of Economics
Other participants (present on October 29)
Adalberto Felinto da Cruz Júnior – Executive Secretary
Carlos Eduardo de Almeida - Senior Advisor at the Deputy Governor for Licensing and Resolution’s Office
Eduardo José Araújo Lima – Head of the Deputy Governor for Economic Policy’s Office
Enrico Bezerra Ximenes de Vasconcelos – Secretary of the Financial Stability Committee and Advisor to
the Board
Fabia Aparecida de Carvalho – Deputy Head of the Research Department
Fabio Araujo – Head of the Economic Advisors’ Office
Gilneu Francisco Astolfi Vivan – Head of the Financial System Monitoring Department
Jaildo Lima de Oliveira - Head of the Prudential and Foreign Exchange Regulation Department
Leonardo Martins Nogueira – Head of the Governor’s Office
Mauro Zanatta – Press Officer
Olavo Lins Romano Pereira – Head of the Deputy Governor for International Affairs and Corporate Risk
Management’s Office Corporate Risks
Renato Baldini Junior– Head of Statistics Department
Ricardo Eyer Harris – Head of the Deputy Governor for Regulation’s Office
Rogério Antônio Lucca – Head of the Deputy Governor for Monetary Policy’s Office
Sílvio Michael de Azevedo Costa - Deputy Head of the Department of International Affairs
The members of Copom 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.
A) Update of Economic Outlook and
Copom’s Baseline Scenario1
1. Data on economic activity since the previous Copom
meeting reinforce the continuity of the Brazilian
economy recovery process. Copom's scenario assumes
that this recovery will occur at a gradual pace.
2. The economy continues to operate with a high level
of economic slack, as reflected in the low industrial
capacity utilization indexes and, mainly, in the
unemployment rate.
3. Regarding the global outlook, the provision of
additional monetary stimulus in major economies, in a
context of economic slowdown and b elow-target
inflation, has been able to generate a relatively
favorable environment for emerging economies. The
outlook remains uncertain, however, and risks of a
more pronounced slowdown in global growth persist.
4. Various measures of underlying inflation are running
at appropriate levels. This includes the components
that are more sensitive to the business cycle and
monetary policy.
5. Inflation expectations for 2019, 2020, 2021, and
2022 collected by the Focus survey are around 3.3%,
3.6%, 3.75%, and 3.5%, respectively.
6. The Copom's inflation projections in the scenario
with interest rate and exchange rate paths extracted
from the Focus survey stand around 3.4% for 2019,
3.6% for 2020, and 3.5% for 2021. This scenario
assumes a path for the Selic rate that ends 2019 at
4.50% p.a., remains at that level over 2020, and ends
2021 at 6.38% p.a. It also assumes a path for the
exchange rate that ends 2019 at R$4.00/US$, remains
at that level over 2020, and ends 2021 at R$3.95/US$.
In this scenario, inflation projections for admi nistered
prices are 5.2% for 2019, 4.0% for 2020, and 3.8% for
2021.
7. In the scenario with a constant exchange rate at
R$4.05/US$2 and the interest rate path from the Focus
survey, the conditional inflation projections are around
3.4% for 2019, 3.7% for 2020, and 3.6% for 2021. In this
scenario, inflation projections for administered prices
are 5.2% for 2019, 4.1% for 2020, and 4.0% for 2021.
1 Unless explicitly stated otherwise, this update takes into
account changes occurred since the September Copom meeting
(225th meeting).
B) Risks Around the Baseline Inflation
Scenario
8. The Copom’s baseline scenario for inflation
encompasses risk factors in both directions.
9. On the one hand, the combination of (i) the high level
of economic slack and (ii) the potential propagation of
current inflation, through inertia, may continue to
produce a lower -than-expected prospective inflation
trajectory.
10. On the other hand, (iii) the current degree of
monetary stimulus, which affects the economy with
lags, increases the uncerta inty about the transmission
channels and may raise the path for inflation over the
relevant horizon for the conduct of monetary policy.
Risk (iii) intensifies in case of (iv) a deterioration of the
outlook for emerging economies or (v) a possible
frustration regarding the continuation of reforms and
the perseverance in the necessary adjustments in the
Brazilian economy.
C) Discussion About the Conduct of
Monetary Policy
11. Copom members discussed the evolution of
economic activity in light of the available information
and indicators. They concluded that the data released
since their previous meeting reinforce the continuation
of the Brazilian economic recovery process. The
Committee estimates that the Gross Domestic Product
(GDP) growth most likely expanded in 2019Q3.
Subsequent quarters should show some acceleration,
which should be reinforced by the stimuli resulting
from the release of FGTS and PIS -PASEP resources –
impacting mainly the last quarter of 2019. Copom’s
baseline inflation scenario assumes that the pace of
underlying economic activity – which excludes the
effects of temporary stimuli – will be gradual.
12. Copom members also evaluated the evolution of
financial conditions indicators. They concluded that the
conditions are favorable, despite some volatility
inherent to those measures. The environment with
favorable financial conditions results from the increase
in the degree of monetary stimulus, the relatively
favorable external environment for emerging
economies and the prospects for improving the
fundamentals of the Brazilian economy, as a result of
the reform agenda. This easing of financial conditions
has been more clearly reflected in the dynamics of non-
2 Value obtained according to the usual procedure of rounding
the average R$/US$ exchange rate observed during the five
business days ending on the Friday prior to the Copom meeting.
earmarked credit and capital markets, which are
growing at robust rates at this stage of the economic
cycle.
13. Copom members also discussed factors that could
affect economic activity, in the context of t he deep
adjustments that the Brazilian economy requires,
notably those of fiscal nature. In a context of limited
fiscal space, they emphasized the relevance of the
approval of the Social Security Reform by the National
Congress, but reinforced the importan ce of the
continuation of the reforms and adjustments that
contribute to the sustainability of fiscal policy. By
reducing fundamental uncertainties about the Brazilian
economy, these reforms tend to work in the same
direction as the monetary policy and, th erefore, to
stimulate private investment. This potential
expansionary effect should counterbalance the impact
of current fiscal adjustments on economic activity, as
well as mitigate the risks of large increases in risk
premia.
14. The Copom stressed the unde rstanding that an
acceleration of the pace of economic recovery to more
robust levels will also depend on other initiatives and
microeconomic reforms aimed at productivity
increases, efficiency gains, greater flexibility of the
economy, and improvements in the business
environment. These efforts are fundamental for the
economic recovery and development of the Brazilian
economy. Initiatives in the structural agenda of the
this process.
15. The Committee also d iscussed the characteristics
of the current business cycle, with lower State
participation in the economy, and their possible
implications for monetary policy. Some Copom
members pointed out that changes in the credit market
and financial intermediation, s uch as the greater role
played by non -earmarked credit and capital markets,
may affect the monetary policy transmission channel.
Copom members also conjectured about the sensitivity
of macroeconomic variables to monetary policy, since
we lack historical precedent in the Brazilian history for
the current degree of stimulus. Given that monetary
policy operates with lags in the economy, especially to
price levels, the assessed factors tend to increase
uncertainty about the monetary policy transmission
channels.
16. Regarding the global outlook, Committee
members deemed the scenario relatively favorable for
emerging economies. On the one hand, central banks
of several economies – some major economies included
– have provided additional monetary stimuli, which
contribute to easing global financial conditions. On the
other hand, the Copom judges that the risks associated
with a slowing global economy and geopolitical
uncertainties remain. Uncertainties in the external
scenario imply risks to assets whose pricing hing e
heavily on a scenario with low global interest rates and
the maintenance of the recent pace of economic
growth. In this context, the Copom members once
again highlighted the capability of the Brazilian
economy to withstand a setback in the international
scenario, given its robust balance of payments,
anchored inflation expectations, and prospects of
continuing structural reforms and of economic
recovery.
17. The Committee members discussed recent
inflation projections and the levels of various measures
of underlying inflation. The latter measures are
deemed to be at comfortable levels. Estimates and
short-term projections indicate that the 12 -month
inflation most likely retreated in October to levels near
the lows observed during the inflation targeting
regime, and should rise again over the last months of
the year. This short -term trajectory reflects a lower
than expected nflation in September and a downward
revision of the October projection. For the last two
months of this year, the projections of some
administered prices have been revised, which, in turn,
offset those disinflationary surprises, keeping the
inflation projection stable relative to the previous
meeting, in the scenario with the interest rate path
from the Focus survey and a constant exchange rate.
18. In the relevant horizon for monetary policy, the
scenario with the interest rate from the Focus survey
and a constant exchange rate results in inflation below
the 2020 target and slightly below the 2021 target.
Relative to the previous Copom meeting, the
conditioning factors had contrasting effects on
inflation for 2020. On the one hand, additional
monetary stimulus from lower interest rates
contributed to increasing inflation over the relevant
horizon. On the other hand, some administered price
adjustments were brought forward to 2019, and,
together with the decline in the Focus survey inflation
expectations, were a vector in the opposite direction,
which eventually prevailed. For 2021, relative to the
previous Copom meeting, the main drivers behind the
projected decline were the propagation of a lower -
than-expected 2020 inflation and the revi sion of
administered prices.
19. The Copom members assessed th at the economic
conditions with anchored inflation expectations,
underlying inflation measures at comfortable levels,
scenarios with inflation projected below or slightly
below target for the relevant horizon of monetary
policy, and high level of slack in the economy prescribe
stimulative monetary policy, i.e., interest rates below
the structural level. The Committee members
expressed the view that the current level of ex-ante real
interest rates provides stimulus to the economy.
20. The Copom reiterates its v iew that the continuity
of reforms and perseverance in the necessary
adjustments in the Brazilian economy are essential for
the consolidation of the reduction of the structural
interest rate, for the full operation of monetary policy,
and for a sustainable economic recovery. The
Committee also stresses that the perception of
continuation of the reform agenda affects current
expectations and macroeconomic projections.
21. The Committee members then discussed the
monetary policy decision, in light of the evoluti on of
the baseline scenario and the balance of risks since its
September meeting (225th meeting). They unanimously
decided to lower the Selic rate to 5.00% p.a.
22. The Copom also discussed the advisability of
providing some perspective on possible monetary
policy scenarios. The Committee decided to express its
assessment that the consolidation of the benign
scenario for prospective inflation should permit an
additional adjustment, of the same magnitude, to the
degree of monetary stimulus. Then, the Committee
discussed the benefits of signaling beyond the next
meeting. The members of the Copom decided to stress
that the current stage of the business cycle
recommends caution when considering possible new
changes in the degree of stimulus.
23. Given the decision to clarify the conditionalities for
the conduct of monetary policy, which best conveys the
economic rationality that guides its decisions, the
Copom deemed it ess ential to emphasize that the
communication of this assessment does not constrain
its next decisions, and to reiterate that the next steps
in the conduct of monetary policy will continue to
depend on the evolution of economic activity, the
balance of risks, and inflation projections and
expectations.
D) Monetary Policy Decision
24. Taking into account the baseline scenario, the
balance of risks, and the broad array of available
information, the Copom unanimously decided to lower
the Selic rate to 5.00% p.a. The Committee judges that
this decision reflects its baseline scenario for
prospective inflation and the associated balance of
risks, and it is consistent with convergence of inflation
to target over the relevant horizon for the conduct of
monetary policy, which includes 2020 and, to a lesser
extent, 2021.
25. The Copom reiterates that economic conditions
prescribe stimulative monetary policy, i.e., interest
rates below the structural level.
26. The Copom sees progress in the process of reforms
and necessary adjustments in the Brazilian economy,
but emphasizes tha t persevering in this process is
essential to allow for the consolidation of the reduction
of the structural interest rate and for a sustainable
economic recovery. The Committee also stresses that
the perception of continuation of the reform agenda
affects current expectations and macroeconomic
projections.
27. In the Copom's assessment, the evolution of the
baseline scenario and of the balance of risks prescribes
adjusting the degree of monetary stimulus, lowering
the Selic rate by 0.50 percentage point. The Committee
deems that the consolidation of the benign scenario for
prospective inflation should permit an additional
adjustment of the same magnitude. The Copom judges
that the current stage of the business cycle
recommends caution when considering possible new
changes in the degree of stimulus. The Committee
reiterates that communicating this assessment does
not restrict its next decisions, and emphasizes that the
next steps in the conduct of monetary policy will
continue to depend on the evolution of econo mic
activity, the balance of risks, and on inflation
projections and expectations.
28. The following members of the Committee voted
for this decision: Roberto Oliveira Campos Neto
(Governor), Bruno Serra Fernandes, Carolina de Assis
Barros, Fernanda Feitosa Nechio, João Manoel Pinho de
Mello, Maurício Costa de Moura, Otávio Ribeiro
Damaso, and Paulo Sérgio Neves de Souza.