BCB COPOM Minutes - Meeting 255
Central bank: bcb | Type: minutes | Date: 2023-06-20

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Minutes of the Meeting of the
Monetary Policy Committee — Copom
June 20-21, 2023
255th
255th Meeting
COPOM
June 20-21
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he 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.
Date: June 20-21, 2023
Place: BCB Headquarters’ meeting rooms on the 8th floor (6/20 and 6/21 on the morning)
and 20th floor (6/21 on the afternoon) – Brasilia – DF – Brazil
Starting and ending
times:
June 20: 10:15 AM – 11:40 PM; 2:30 PM – 6:15 PM
June 21: 10:20 AM – 11:38 AM; 2:40 PM – 6:36 PM
In attendance:
Copom Members Roberto de Oliveira Campos Neto – Governor
Carolina de Assis Barros
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 6/20 and on the
morning of 6/21):
Alan da Silva Andrade Mendes – Department of Foreign Reserves
André Minella – Research Department (also present on the afternoon of 6/21)
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 6/20 and
on the morning of 6/21):
Arnildo da Silva Correa – Head of the Office of Economic Advisory
Cristiano de Oliveira Lopes Cozer – General Counsel
Eduardo José Araújo Lima – Head of Office of the Deputy Governor for Economic Policy
Eugênio Pacceli Ribeiro – Executive Secretary
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
Julio Cesar Costa Pinto – Head of Office of the Deputy Governor for Monetary Policy
Laura Soledad Cutruffo Comparini – Deputy Head of the Department of Economics
Mariane Santiago de Souza – Head of the Governor’s Office
Mauro Zanatta – Press Office Advisor
Olavo Lins Romano Pereira – Deputy Head of the Department of International Affairs
Ricardo Eyer Harris – Head of Office of the Deputy Governor for Regulation
Ricardo Franco Moura – Head of the Prudential and Foreign Exchange Regulation Department
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A) Update of economic outlook and Copom’s scenario1
1. The global environment remains challenging. Despite some attenuation on the stress
involving banks in the US and Europe and the limited contagion on financial conditions
so far, the situation still requires monitoring. It is noticeable, however, a tighteni ng in
the US credit markets with still uncertain impacts but with a negative bias for the
economic growth.
2. At the same time, the central banks of major economies remain committed to
bringing inflation back to its targets, in an environment in which infla tion 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, it has been recently observed the
resumption of the cycle of interest rate hikes in some economies that, in their majority,
signal a prolonged period of high interest rates to fight inflationary pressures, which
calls for greater caution in the conduct of economic policies also by emerging countries.
3. Regarding the domestic scenario, the recent set of indicators suggests a scenario of
gradual deceleration. The release of the GDP for the first quarter of 2023 surprised
positively, with most of the surprise reflecting the agricul tural performance, but with
less dynamism in the more cyclical economic sectors. The labor market, which surprised
positively throughout 2022, has shown some resilience, with a net increase in job
creation and relative stability in the unemployment rate. However, a reduction in the
participation rate was observed.
4. Consumer inflation has been reduced in the recent period, with emphasis on the
dynamics in industrial goods and food. The inflation of the components more sensitive
to the economic cycle and the m onetary policy, which present greater inflationary
inertia, showed an incipient improvement, but remain above the range compatible with
meeting the inflation target. Inflation expectations for 2023 and 2024 collected by the
Focus survey have reduced and are around 5.1% 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 4.852 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 5.0% for 2023 and 3.4%
for 2024. Inflation projections for administered prices are 9.0% for 2023 and 4.6% for
2024.
6. Following the extensive debate and based on the accumulated evidence over recent
meetings, the Committee opted to increase the estimated neutral real interest rate
from 4.0% p.a. to 4.5%. Copom members evaluated the different factors that justify an
increase and converged on the conclusion that there was a rise in the neutral rate.
Among the mentioned factors that support the increase of the neutral interest rates
are the likely increase of neutral interest rates in the major economies, the resilience in
the Brazilian economic activity jointly wi th a slow disinflationary process, as well as an
analysis of supporting models that incorporate different methodologies.
7. The Committee evaluates that the international outlook is somewhat more favorable
for the inflationary process in Brazil, but the low degree of slack in the labor market in
1 Unless explicitly stated otherwise, this update takes into account changes that occurred since the May
Copom meeting (254th meeting).
2 Value obtained according to the usual procedure of rounding the average USD/BRL exchange rate observed
in the five business days ending on the last day of the week before the Copom meeting.
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some economies and the current inflation persistently high and widespread in the
services sector suggest that inflationary pressures should take long to dissipate.
However, some factors might reduce external inflationary pressures. First among these
is the commitment of central banks to the control of inflation by maintaining tighter
financial conditions for a longer period. Such determination, albeit with a likely impact
upon domestic asset prices in the short term, coupled with a credit slowdown in major
economies, contributes to a more credible and lasting global disinflationary proces s.
Besides, the recent dynamics of the exchange rate and international commodity prices,
although with greater volatility, also contribute to slowdown international pressures.
8. Brazilian activity data, in particular the release of the GDP growth for the first quarter
of 2023, continues to indicate a deceleration in the sectors most sensitive to the
economic cycle. At the margin, the pace of growth was moderate, except for the strong
growth of the agricultural sector. In any case, it is anticipated that after this greater
growth in the agricultural sector in the first quarter has passed – due to the seasonality
of the harvest – the process of moderating growth in the more cyclical sectors of the
economy will deepen over the following quarters.
9. The Committee debated the recent labor market data. On the one hand, formal
employment data continued to reveal increase in job creation in the most recent period.
On the other hand, the unemployment rate remains relatively stable, but with a lower
participation rate than in the pre -pandemic period. The Committ ee discussed the
possible reasons for the fall in the participation rate, evaluating whether this movement
should be read as structural or cyclical, which would have different impacts on the
participation rate in effect in the long term. Some members noted that the recent
process towards a partial recomposition of losses in real wages moves forward. This
movement is expected and has been accompanied by a deceleration in nominal gains,
which is expected to intensify ahead.
10. The Committee believes that the disinflation dynamics is still 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 is 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 Committee
reaffirms that the disinflation pr ocess at its current stage demands serenity and
patience in the conduct of monetary policy to ensure the convergence of inflation to its
targets.
11. Still in the discussion about inflationary behavior, the recent benign behavior of
wholesale prices was emphas ized, both for food and industrial goods. On the food
front, logistical issues, together with favorable weather and a good harvest contributed
to a revision in the outlook for food prices for 2023 and, to a lesser extent, for 2024.
For the latter, however, the uncertainty about the impact of the El Niño phenomenon
stands out. Regarding industrial goods, wholesale prices, as well as the normalization
of supply chains, have also led to a revision in the dynamics of these sectors. The
Committee assesses that t he consolidation of such dynamics contributes to the
disinflationary process and should have some indirect impact on the other items. In
terms of the trajectory of consumer inflation over 2023, it should be noted that the
continuity of the drop is expected in the twelve- month inflation during this second
quarter, due to the base effect of the previous year. For the second half of 2023,
however, a higher twelve- month inflation is expected, as a consequence of the
exclusion in this indicator of the effect of the tax measures that reduced the price level
in the third quarter of 2022 and of the maintenance of the effects of this year's tax
measures. Copom emphasizes that it will also continue to monitor inflationary dynamics
in underlying inflation measures, which best reflect the current inflation trend as well
as its prospects.
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12. Inflation expectations remain deanchored from the targets set by the National
Monetary Council, with a small reduction of the deanchoring at the margin. The
Committee 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
upward pressure on 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 the reanchoring of expectations and that raise confidence in inflation
targets would contribu te to a faster and less costly disinflation process, allowing
monetary easing.
13. The domestic credit granting scenario is compatible with the current stage of the
monetary policy cycle. 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 stresses 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.
14. The Committee also discussed the impacts of the fiscal scenario on inflation and
assesses that the presentation and processing of the fiscal framework have
substantially reduced the uncertainty surrounding fiscal risk. Challenges to meet the
targets set for the primary result remain, although in the Committee's discussion, the
commitment and the presentation of measures to achieve these results were
emphasized. Copom again emphasized that there i s 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.
15. The Committee emphasizes that risks to i ts scenarios 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) some
residual uncertainty about the final fisc al framework 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, even though a sizable portion of this
movement has already be en observed; (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 concession larger than what would be
compatible with the current stance of monetary policy.
C) Discussion about the conduct of monetary policy conduct
16. Copom then discussed the conduct of monetary policy, considering the set of
projections analyzed, as well as the balance of risks for prospective inflation.
17. The Committee judges that the current context, marked by unanchored
expectations for longer terms and characterized by a stage of the disinflationary
process that tends to be slower, requires parsimony and caution in the conduct of
monetary policy.
18. The Committee unanimously believes that flexibilization of the degree of monetary
tightening requires confidence in the trajectory of the disinflation process, since
premature flexibilization could lead to a reacceleration of the inflationary process and,
consequently, to a reversal of the monetary easing process itself. The materialization of
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this type of scenario can negatively impact not only the credibility of monetary policy,
but also the financial conditions.
19. In this debate, a divergence was observed in the Committee concerning the degree
of signaling regarding the next steps. The prevailing assessment was that the
continuation of the ongoing disinflationary process, with its consequent impact on
expectations, may allow the necessary confidence to be built up to start a parsimonious
process of inflection at the next meeting. Another group was more cautious,
emphasizing that the disinflationary dynamics still reflects the retreat of the most
volatile components and that the uncertainty about the output gap creates doubt
about the impact o f the monetary tightening implemented so far. For this group, it is
necessary to observe further reanchoring of long -term expectations and accumulate
more evidence of disinflation in the more cyclically sensitive components. However, the
Committee members unanimously agreed that the future steps of monetary policy will
depend on the inflationary dynamics, especially the components that are more sensitive
to monetary policy and economic activity, on inflation expectations, in particular the
longer-term ones, on its inflation projections, on the output gap, and on the balance of
risks.
20. Following the usual analysis, the Committee discussed the different determinants
that impact the conduct of the monetary policy. Listing the determinants analyzed in
the meeting, there was no major change in the forward -looking output gap scenario,
where the gap is projected to open slowly. Resilience of the economic activity in the
first quarter was discussed, but the Committee's view remains that growth was driven
by the agricultural sector and that the other sectors should show modest growth
throughout 2 023. As for services inflation and core inflation a slow deceleration
movement is observed, in line with the non -linear process anticipated by the
Committee. In addition, inflation expectations declined slightly, but remain
deanchored, partially due to the questioning about a possible change in future inflation
targets. The Committee believes that decisions that reanchor expectations can lead to
faster disinflation. Copom's inflation projections have been reduced, especially in the
relevant scenario, to a large extent due to lower inflation expectations. Finally, on the
balance of risks, the Committee assesses that uncertainty about the final design of the
fiscal framework is residual. Besides this, it noted that part of the downward risk coming
from commodity prices has already materialized in the recent period.
D) Monetary policy decision
21. Considering the assessed scenarios, the balance of risks, and the broad array of
available information, Copom decided to maintain the Selic rate at 13.75% p.a. and
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. The current context, characterized by a stage in which the disinflationary process
tends to be slower and in an environment of deanchored inflation ex pectations
continues to require caution and parsimony. Copom reaffirms its commitment to set
monetary policy to meet the targets and judges that the strategy of maintaining the
Selic rate for a long period has been adequate to ensure the convergence of inf lation.
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 and reminds that the future steps of monetary policy will depend on
the inflationary dynamics, especially the components that are more sensitive to
monetary policy and economic activity, on inflation expectations, in particular the
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longer-term ones, on its inflation projections, on the output gap, and on the balance of
risks.
23. The following members of the Committee voted for this decision: Roberto de
Oliveira Campos Neto (Governor), Carolina de Assis Barros, Diogo Abry Guillen,
Fernanda Magalhães R umenos Guardado, Maurício Costa de Moura, Otávio Ribeiro
Damaso, Paulo Sérgio Neves de Souza and Renato Dias de Brito Gomes.