BCB COPOM Minutes - Meeting 265
Central bank: bcb | Type: minutes | Date: 2024-09-17

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Minutes of the Meeting of the
Monetary Policy Committee — Copom
September 17-18, 2024
265th
265th Meeting
COPOM
September 17-18
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Date:
September 17-18, 2024
Place: BCB Headquarters’ meeting rooms on the 8th floor – Brasilia – DF – Brazil
Starting and ending
times:
September 17: 10:07 AM – 12:43 PM; 2:46 PM – 6:53 PM
September 18: 10:21 AM – 11:30 AM; 2:32 PM – 6:41 PM
In attendance:
Copom Members Roberto de Oliveira Campos Neto – Governor
Ailton de Aquino Santos
Carolina de Assis Barros
Diogo Abry Guillen
Gabriel Muricca Galípolo
Otávio Ribeiro Damaso
Paulo Picchetti
Renato Dias de Brito Gomes
Rodrigo Alves Teixeira
Department Heads in
charge of technical
presentations (attending
on 9/17 and on the
morning of 9/18):
Alan da Silva Andrade Mendes – Department of Foreign Reserves
André Minella – Research Department (also present on the afternoon of 9/18)
André de Oliveira Amante – Open Market Operations Department
Marcelo Antonio Thomaz de Aragão – Department of International Affairs
Ricardo Sabbadini – Department of Economics
Rogério Antônio Lucca – Department of Banking Operations and Payments System
Other participants André Maurício Trindade da Rocha – Head of the Financial System Monitoring Department
(attending on 9/17 and Arnaldo José Giongo Galvão – Press Office Advisor
on the morning of 9/18): Arnildo da Silva Correa – Head of Office of the Economic Advisor
Cristiano de Oliveira Lopes Cozer – General Counsel
Daniela Torres de Mesquita de Souza Vale – Head of the Governor’s Office
Edson Broxado de França Teixeira – Head of Office of the Deputy Governor for Supervision
Eduardo José Araújo Lima – Head of Office of the Deputy Governor for Economic Policy
Euler Pereira Gonçalves de Mello – Deputy Head of the Research Department
Fábio Martins Trajano de Arruda – Deputy Head of the Department of Banking Operations and
Payments System (present on the morning of 9/17)
Fernando Alberto G. Sampaio de Cavalcante Rocha – Head of the Department of Statistics
Fernando Ryu Ramos Kawaoka– Deputy Head of the Department of Economics
Gilneu Francisco Astolfi Vivan – Head of the Financial System Regulation Department
Julio Cesar Costa Pinto – Head of Office of the Deputy Governor for Monetary Policy
Kathleen Krause – Head of the Prudential and Foreign Exchange Regulation Department
Leonardo Martins Nogueira – Executive Secretary
Luís Guilherme Siciliano Pontes – Deputy Head of the International Reserves Department
Olavo Lins Romano Pereira – Deputy Head of the Department of International Affairs
Ricardo Eyer Harris – Head of Office of the Deputy Governor for Regulation
Simone Miranda Burello – Advisor in the Office of the Deputy Governor for Monetary Policy
The Copom members analyzed the recent performance and prospects for the Brazilian and
international economies, under the monetary policy framework, whose objective is to achieve the
inflation targets established by the National Monetary Council.
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A) Update of the economic outlook and the Copom’s scenario1
1. The global environment remains challenging, due to the inflection point of the
economic cycle in the United States, which poses questions about the pace of economic
deceleration, disinflation and, consequently, about the Fed’s monetary policy stance.
2. The central banks of major economies remain committed to bringing inflation back
to its targets in a context characterized by labor market pressures. The Committee
judges that the external environment, also marked by less synchrony in monetary policy
cycles across countries, continues to require caution from emerging market economies.
3. Regarding the domestic scenario, the set of indicators on economic activity and labor
market has been exhibiting more strength than expected by Copom, which led to a
reassessment regarding the output gap as being positive.
4. Headline inflation measured by the Extended National Consumer Price Index (IPCA)
as well as various measures of underlying inflation are above the inflation target in
recent releases. Inflation expectations for 2024 and 2025 collected by the Focus survey
are around 4.4% and 4.0%, 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 5.602 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.
Moreover, the energy tariff flag is assumed to be “yellow” in December of years 2024
and 2025.
6. In the reference scenario, Copom's projections are for disinflation, but with inflation
still above the target of 3.0% in the current relevant monetary policy horizon. The four-
quarter inflation projection for the first quarter of 2026 is 3.5% (Table 1). I nflation
projections for the calendar years 2024 and 2025 are 4.3% and 3.7%, respectively.
7. The external environment remains challenging but appears more benign than in the
previous meeting. Regarding the U.S., high uncertainty persists about the degree of
easing of labor market pressures and of the economic activity slowdown. It is perceived
that the U.S. economy is at an inflection point, where, naturally, extracting the
underlying trends of employment and activity variables is more difficult. In any case, the
Committee’s reference scenario is o f a gradual and orderly slowdown of the U.S.
economy. The Committee also discussed the Chinese slowdown and changes in
commodity prices. In addition, the disinflationary process has continued in several
countries, although challenges that should not be underestimated to bring inflation
back to the target remain. In this regard, it was noted that, after a global inflationary
shock that led to a correlated response from central banks , the specific dimensions of
each economy have played a greater role, leading to a lower correlation of monetary
policy cycles across countries.
8. The response of economic policies in several countries to this scenario has also been
challenging. On the one hand, the Committee highlighted the role of fiscal policies as
drivers of demand after the pandemic but stressed that the scope for fiscal policy has
become more limited with the increase in public debt and concerns about fiscal
sustainability. On the other hand, monetary policies, in such an uncertain environment,
remain reactive and data -dependent in most countries, also causing inherent volatilit y
1 Unless explicitly stated otherwise, this update considers changes since the July Copom meeting (264 th
meeting).
2 Corresponds to the rounded value of the average exchange rate observed over the ten working days ending
on the last day of the week prior to the Copom meeting, according to the procedure adopted since the 258th
meeting.
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to the markets, as observed during the recent period. Furthermore, the Committee
reinforced that the central banks' commitment to achieving their targets is a
fundamental ingredient in the disinflationary process, corroborated by recent
indications of cautious monetary policy cycles in several countries.
9. The BRL exchange rate has shown volatility in the period , reflecting the various
changes in the domestic and international scenarios. Copom reinforced that there is no
mechanical relationship between the conduct of the U.S. monetary policy and the
determination of the domestic policy interest rate, nor between the exchange rate and
the domestic determination of the interest rate. As usual, the Committee will focus on
the transmission mechanisms from the external environment to the domestic inflation
dynamics and their impact on the outlook. It was also emphasized that a context of
greater global uncertainty and more abrupt exchange rate movements requires greater
caution in the conduct of domestic monetary policy.
10. The Committee continues to assess that the domestic economic activity and the
labor market have been more dynamic than expected, leading to a reassessment of the
output gap to a positive value. Several members emphasized that the activity dynamics
in the recent period has been highly relevant , highlighting the surprises for the
Committee and for market analysts, as portrayed in the Focus survey. This activity
growth pace, in the context of a n output gap that is now considered positive, makes
more challenging the process of inflation convergence to the target. The combination
of a robust labor market, expansionary fiscal policy, and vigorous lending to households
continue to support consumption and, consequently, aggregate demand. In a nutshell,
in light of the updating of activity data for the period and of the models presented, the
Committee concluded that the output gap is in positive territory.
11. The Committee noticed a persistent dynamism in the labor market, with real wage
gains in recent months. As there is no evidence of a significant increase in productivity,
these gains could reflect pressures on the labor market. In this regard, some members
emphasized the evidence of lack of job supply in some sectors. The potential impact of
the labor market on inflation was then discussed. It was argued that there is no evidence
yet of wage pressures on prices, but that real wage growth, if persistent and
outstripping productivity gains, will end up having an impact on prices. The Committee
realizes, however, that the timing and magnitude of this transmission channel remain
uncertain.
12. Copom reinforced its view that the slowdown in structural reform efforts and fiscal
discipline, the increase in earmarked credit, and uncertainties over the public debt
stabilization have the potential to raise the economy's neutral interest rate, with
deleterious impacts on the power of monetary policy and, consequently, on the cost of
disinflation in terms of activity.
13. The Committee closely monitors how the recent developments on the fiscal side
impact monetary policy and financial assets. Moreover, it was noted that the market
agents' more recent perception about the growth of public spending and the
sustainability of t he current fiscal framework, along with other factors, has had a
significant impact on asset prices and expectations. A credible fiscal policy, based on
predictable rules and transparency in its accounts, together with the pursuit of fiscal
strategies that signal and reinforce the commitment to the fiscal framework in the
coming years are important elements for anchoring inflation expectations and reducing
the risk premia of financial assets, consequently impacting monetary policy. Copom
incorporates in its scenarios a slowdown in the growth rate of public spending over
time. Synchronous and countercyclical monetary and fiscal policies help ensure price
stability and, without prejudice to its fundamental objective, smooth out fluctuations in
the economic activity level and foster full employment.
14. Deanchoring inflation expectations is a factor of discomfort shared by all
Committee members. Reanchoring expectations is an essential element in ensuring
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that inflation converges to the target at the lowest possible cost in terms of activity.
Copom believes that the conduct of monetary policy is a fundamental factor in
reanchoring expectations and will continue to make decisions that safeguard credibility
and reflect the fundamental role of expectations in inflation dynamics.
15. The credit cycle continues with volume expansion and interest rates reduction in
most lines, both in the households and corporate segment. There is greater risk
appetite in credit supply but the slight worsening in the quality of household credit has
not yet become an increased materialization of risks. Capital market funding remains
strong.
16. The Committee assessed that inflation data suggest a deterioration in the
composition of inflation, although the aggregate index did not diverge significantly
from what was expected one quarter ago. The disinflationary process was interrupted
in the more recent period. Inflation rates for industrial goods and food -at-home grew
at the margin, possibly reflecting the exchange rate depreciation and a more
challenging climate scenario. At the same time, services inflation, which has greater
inertia, plays a maj or role in the disinflationary dynamics at the current stage. The role
of labor market dynamics and inflation expectations in determining services inflation
was then discussed. The Committee concluded that current inflation, measured by the
headline index or by different core measures, at levels above the target, in a context of
dynamic economic activity, makes the convergence of inflation to the target more
challenging.
17. Copom concluded by assessing that the inflation outlook has become more
challenging, with the increase of medium -term inflation projections, even conditioned
on a steeper interest rate path.
18. The Committee judges that the risks to its inflation scenarios are tilted to the
upside. Among the upside risks for the inflation outlook and inflation expectations, it
should be emphasized (i) a more prolonged period of deanchoring of inflation
expectations; (ii) a stronger -than-expected resilience of services inflation due to a
tighter output gap; and (iii) a conjunction of internal and external economic policies
with an inflationary impact, for example, through a persistently more depreciated
currency. Among the downside risks, it should be noted (i) a greater -than-projected
deceleration of global economic activity; and (ii) an impact on global inflation larger
than expected from monetary policy tightening.
C) Discussion of the conduct of monetary policy
19. Copom then discussed the conduct of monetary policy, considering the set of
projections evaluated, as well as the balance of risks for prospective inflation. The
Committee focused on three dimensions in its deliberation on the monetary policy
action to be taken.
20. Firstly, it assessed that the scenario, marked by resilient economic activity, labor
market pressures, positive output gap, an increase in the inflation projections, and
deanchored expectations, requires a more contractionary monetary policy. The
Committee has outlined its response function over time, making its conduct
transparent, and will pursue its mandate in full.
21. Secondly, the Committee considered that the start of the cycle should be gradual
to, on the one hand, benefit from diligent data monitoring, especially in a context of
uncertainties, both in external and domestic scenarios, but, on the other hand, allow
the transmission mechanisms of monetary policy that will enable the convergence of
inflation back to the target to begin operating. All members agreed to start the
monetary policy tightening cycle gradually.
22. Thirdly, the Committee discussed the pace and magnitude of the interest rate
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adjustment, as well as its communication. In view of the uncertainties involved, the
Committee preferred a communication that reinforced the importance of monitoring
the scenarios over time, without giving any future indication of its next steps but
insisting on its firm commitment to the convergence of inflation to the target.
D) Monetary policy decision
23. The scenario, marked by resilient economic activity, labor market pressures, positive
output gap, an increase in the inflation projections, and deanchored expectations,
requires a more contractionary monetary policy. Considering the evolution of the
disinflationary process, the assessed scenarios, the balance of risks, and the broad array
of available information, Copom unanimously decided to increase the Selic rate by 0.25
p.p. to 10.75% p.a., and judges that this decision is consistent with the strategy f or
inflation convergence to a level around its target throughout the relevant horizon for
monetary policy. Without compromising its fundamental objective of ensuring price
stability, this decision also implies smoothing economic fluctuations and fostering full
employment.
24. The pace of future adjustments of the interest rate and the total magnitude of the
cycle that has just started will be determined by the firm commitment of reaching the
inflation target and will depend on the inflation dynamics, especially the components
that are more sensitive to monetary policy and economic activity, on the inflation
expectations, on the inflation projections, on the output gap, and on the balance of
risks.
25. The following members of the Committee voted for this decision: Roberto de
Oliveira Campos Neto (Governor), Ailton de Aquino Santos, Carolina de Assis Barros,
Diogo Abry Guillen, Gabriel Muricca Galípolo, Otávio Ribeiro Damaso, Paulo Picchetti,
Renato Dias de Brito Gomes, and Rodrigo Alves Teixeira.