BCB COPOM Minutes - Meeting 258
Central bank: bcb | Type: minutes | Date: 2023-11-01

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Minutes of the Meeting of the
Monetary Policy Committee — Copom
October 31 – November 1, 2023
258th
258th Meeting
COPOM
October 31 -
November 1
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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.
Date:
October 31 – November 1, 2023
Place: BCB Headquarters’ meeting rooms on the 8 th floor (10/31 and 11/1 on the
morning) and 20th floor (11/1 on the afternoon) – Brasilia – DF – Brazil
Starting and ending
times:
October 31: 10:08 AM – 11:55 AM; 2:33 PM – 5:40 PM
November 1: 10:35 AM – 11:48 AM; 2:38 PM – 6:30 PM
In attendance:
Copom Members Roberto de Oliveira Campos Neto – Governor
Ailton de Aquino Santos
Carolina de Assis Barros
Diogo Abry Guillen
Fernanda Magalhães Rumenos Guardado
Gabriel Muricca Galípolo
Maurício Costa de Moura
Otávio Ribeiro Damaso
Renato Dias de Brito Gomes
Department Heads in
charge of technical
presentations (attending
on 10/31 and on the
morning of 11/1):
Alan da Silva Andrade Mendes – Department of Foreign Reserves
André Minella – Research Department (also present on the afternoon of 11/1)
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 10/31 and
on the morning of 11/1):
André Luiz Caccavo Miguel – Head of the Financial System Monitoring Department
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 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
Fernando Alberto G. Sampaio de Cavalcante Rocha – Head of the Department of Statistics
Isabela Ribeiro Damaso Maia – Head of the Sustainability and International Portfolio Investors
Unit (present on 10/31)
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
Leonardo Martins Nogueira – Executive Secretary
Luís Guilherme Siciliano Pontes – Deputy Head of the International Reserves Department
(present on 10/31)
Marcelo Antonio Thomaz de Aragão – Deputy Head of the Department of International Affairs
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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COPOM
October 31 -
November 1
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A) Update of economic outlook and Copom’s scenario1
1. The global environment is adverse, due to an increase in longer-term interest rates in
the United States, the persistence of high core inflation in many countries, and new
geopolitical tensions.
2. The central banks of major economies remain committed to bringing inflation back
to its targets in an environment characterized by labor market pressures. The
Committee judges that the environment requires attention and caution from emerging
market economies.
3. Regarding the domestic outlook, the recent set of economic activity indicators
remains consistent with the deceleration scenario expected by the Committee.
Deceleration was observed in the August data, particularly in services. Conversely, the
labor market continues strong, albeit with some moderation at the margin.
4. Consumer inflation continues on the expected disinflation ary trajectory, with a
benign composition, decelerating in both services and core inflation. Indicators
aggregating the components more sensitive to the economic cycle and the monetary
policy, which have greater inflationary inertia, w ere lower but remained above the
target. Inflation expectations for 2023, 2024, and 2025 collected by the Focus survey
are around 4.6%, 3.9%, and 3.5%, 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 5.002 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 assumed to be “green” in December 2023, 2024,
and 2025. In this scenario, Copom’s inflation projections stand at 4.7% for 2023, 3.6%
for 2024, and 3.2% for 2025. Inflation projections for administered prices are 9.3% for
2023, 5.0% for 2024, and 3.6% for 2025.
6. The Committee evaluates that the international outlook is adverse. After the first
disinflation stage following the normalization of productive chains, the early effects of
the monetary policy tightening, and the reduction of pressures on commodities, Copom
is focused on the disinflation sources for the next quarters. Amid an uncertain
geopolitical context, with a strong labor market and tightened output gap in advanced
economies, Copom believes that the prolonged monetary policy tightening strategy
has been essential to control global inflation, facilitating inflation control in emerging
markets. Conversely, the global monetary tightening can put pressure on the exchange
rate and impact the prices of domestic assets, contributing to a slower disinflation
process in the short term.
7. Risks around the global scenario have increased. The rise of long-term interest rates
in the US tightens financial conditions but it is still uncertain the lag and magnitude of
this impact on the US economic activity, which remains resilient. In face of the increased
long-term interest rates, the Committee discussed, at first, the possible reasons for this
phenomenon. In its discussion, Copom mostly emphasized the fiscal prospects,
particularly in the US, highlighting their impacts on global financial conditions. Copom
also discussed how the US economy’s resilience would impact the length of the required
1 Unless explicitly stated otherwise, this update takes into account changes that occurred since the
September Copom meeting (257th meeting).
2 The value for the exchange rate was obtained according to the procedure of rounding the average USD/BRL
exchange rate observed on the ten business days ending on the last day of the week before the Copom
meeting, as it was announced in the Inflation Report of September 2023.
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tightening for the inflation convergence in the US. For some membe rs, the
current outlook is highly uncertain, and the combination of a substantial tightening of
financial conditions with the activity resilience can make it more difficult to
achieve a soft landing.
8. Copom debated the multiple transmission channels of US interest rates to the
Brazilian economy, discussing the effects via interest rate, forward premium in the
interest rate curve, external demand, exchange rate, neutral interest rate, commodity
prices, among others. Firstly, the Committee e mphasized the impact of the need to
attract resources to finance higher debt in developed countries. Other markets – such
as the emerging sovereign debt and private credit markets – have been affected in this
environment of higher sovereign debt interest rates in central economies. The final
impact on those markets will be greater the longer the higher interest rates last, which
could lead to reallocations in the debt rollover process. Another channel, with direct
effect on inflation, is via exchange rate. In this discussion, Copom highlighted that,
despite the severity of such events as the conflict in the Middle East and the substantial
movement in the prices of international assets, the exchange rate and the oil price have
had moderate changes so far. Finally, when incorporating the multiple transmission
channels into a more uncertain environment, Copom evaluates as appropriate to adopt
a more cautious stance in face of the risks involved.
9. Regarding the domestic economic activity, the Committee continues to anticipate an
economic activity deceleration during the second half of the year, after growth
surprises in the first half. In line with this understanding, data released in the more
recent period suggest loss of dynamics in the services sector following a higher -than-
expected expansion in the first half of the year. Copom noticed that, for the industry,
the scenario remains stable, with the most credit-sensitive sectors registering stronger
deceleration. In addition, inventories also increased in several sectors. Therefore,
activity data released since the previous meeting corroborate the scenar io outlined by
Copom.
10. Copom reinforced its view that the lack of commitment to structural reforms and
fiscal discipline, the increase of earmarked credit granting, and the uncertainties about
the stabilization of the public debt have the potential to raise the neutral interest rate
of the economy, with harmful impacts on the power of monetary policy and,
consequently, on the cost of disinflation in terms of activity.
11. In its analysis of the labor market, the Committee first discussed the developments
n the employment level. The unemployment rate continues to decline, although recent
data also reflect a fall in the participation rate. Data relative to formal job hirings remain
at high levels, consistent with a very dynamic labor market. Part of the discussion was
then focused on the workers’ earnings and income, which suggest some acceleration in
real gains in the more recent period. The Committee considered that this development
can reflect temporary issues and continues evaluating that there is no evidence of high
wage pressures in labor negotiations, although judged as important to keep monitoring
very carefully the several labor market variables. The recent reduction in the 12-month
inflation makes it difficult to analyze real gains in an environment of wage rigidity,
leading to different conclusions by different survey s and analysis about the change in
real wages at the margin. Copom will continue to pay attention to the dynamics of
earnings coming from several surveys to better evaluate the degree of slack in the labor
market and its potential impacts on the services inflation.
12. The deceleration in credit granting is in line with the monetary policy stance. A
stronger deceleration is seen in corporate credit granting, coupled with a
recomposition involving relatively less credit granted via banking sector and more via
capital markets. A marked heterogeneity between the productive sectors remains both
in the interest rates and in the volumes of granting credit . Household credit, in turn,
shows lower deceleration and a recovery favoring low-cost modalities. Despite the tight
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monetary conditions, Copom emphasized that the transmission of the monetary policy
cycle expected by the market to the interest rates of new credit granting is already seen.
13. The Committee had been assessing that the fiscal uncertainty was limited to the
execution of targets already presented but noted that, in the more recent period,
uncertainty increased about the target itself for the fiscal balance, which led to an
increased risk premium. Given the importance of the execution of the fiscal targets
already established for the anchoring of inflation expectations, and hence for the
conduct of monetary policy, the Committee reaffirms the importance of firmly pursuing
those targets.
14. Copom judged that the benign evolution of the current inflation continues as
already expected. As anticipated, some sources of disinflation that contributed to the
first disinflation stage are no longer present. In particular, a lower downside pressure
is observed in the wholesale prices of industrial goods, which, until recently, were still
normalizing with the end of the bottlenecks in productive chains. Similarly, prices of
international agricultural commodities and domestic food prices, which also
contributed to disinflation throughout 2023, no longer suggest downside pressures
with the same intensity in the next quarters. Furthermore, the components related to
industrial goods and administered prices might present a less benign behavior than
previously expected, due to the recent movement of the exchange rate and the prices
of international commodities. Copom still assesses that the inherent volatility of food
and industrial goods components suggests the possibility of abrupt reversals,
recommending caution.
15. For the prospective scenario, Copom discussed more thoroughly the determinants
of services inflation. The risks related to the El Niño weather phenomenon – partially
incorporated into the reference scenario – were also mentioned, as well as those
related to international oil price developments. Copom highlighted the uncertainty
surrounding El Niño in terms of its magnitude, the period in which the phenomenon
would have the greatest impact, and the particular impacts on different food products.
Copom opted to incorporate a relatively small impact of the El Niño into its food
inflation projections, but some members stressed the inflationary impacts in the event
of a more extreme phenomenon. In the end, it was unanimously concluded that a
contractionary and cautious monetary policy was needed to reinforce the
disinflationary dynamics.
16. Inflation expectations remain unanchored and are a cause for concern. The
Committee believes that lowering expectations requires firm action by the monetary
authority, as well as continued strengthening of the credibility and reputation of both
the institu tions and the fiscal and monetary frameworks that make up the Brazilian
economic policy.
17. The Committee emphasizes that risks to its 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; and (ii) a
stronger-than-expected resilience of services inflation due to a tighter output gap.
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 synchronized monetary policy tightening. In light of the international
environment, the Committee judges that the current conjuncture is more uncertain
than usual and requires caution on the conduct of monetary policy.
C) Discussion about the conduct of monetary policy
18. Copom discussed the conduct of monetary policy, considering the set of projections
evaluated, as well as the balance of risks for the prospective inflation.
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19. The Committee believes that there has been significant disinflationary progress, in
line with what the Committee had anticipated, but there is still a long way to go to
anchor expectations and return inflation to the target, which requires serenity and
moderation on the conduct of monetary policy.
20. The domestic scenario is moving in line with what was expected. The conclusion is
that the disinflationary path of core and services inflation continues, reinforcing the
recent benign dynamics of inflation. Moreover, recent data suggest a certain
moderation in economic activity, as anticipated by the Committee, particularly in
services and trade. Inflation e xpectations for longer maturities have remained
unanchored since the previous Copom meeting. Finally, inflation projections for the
relevant horizon hav e risen somewhat and are above the target. The reasons for the
increase include changes in administered prices projected for 2024 and the trajectories
of economic activity, economic slack, and labor market, which suggest a tighter output
gap, with an impact on market prices inflation.
21. The global outlook, however, has been more volatile and adverse. There are
multiple transmission mechanisms from the international to the domestic economy,
both financial and economic, which must be incorporated into the decision -making
process. One member believes that the external scenario introduces an asymmetric
upward bias in the balance of risks for inflation. The other members believe that the
international scenario primarily affects the degree of uncertainty regarding the balance
of risks. The Committee is unanimous in its assessment that the increased uncertainty
in the global scenario calls for caution.
22. After the scenario evaluation, all members agreed that it was appropriate to reduce
the Selic rate by 0.50 percentage point to adjust the degree of prospective monetary
tightening.
23. The Committee analyzed several prospective scenarios, characterized by different
trajectories in the domestic and international environments. The n, it discussed the
appropriate strategy and cycle length in each of these scenarios . It was decided to
maintain the recent communication, which already includes the appropriate
conditionality in an uncertain environment , specifying the course of action if the
expected scenario is confirmed. Regarding the next steps, Copom members
unanimously anticipated cuts of 0.50 percentage point in the next meetings and judged
that this pace is appropriate to keep the necessary contractionary monetary policy for
the disinflationary process. This pace brings together, on the one hand, the firm
commitment with the reanchoring of expectations and the disinflationary dynamics
and, on the other hand, the adjustment in the level of monetary tightening in real terms
in face of the more benign inflation dynamics, which was anticipated in the reference
scenario projections.
24. Finally, the Committee debated the extension of the monetary policy adjustments
cycle in an uncertain global outlook. The Committee assesses the need to maintain a
still contractionary monetary policy in the relevant horizon to consolidate the inflation
convergence to the target and the anchoring of expectations. Copom emphasized again
that the extension of the cycle over time will depend on t he 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. The Committee maintains
its firm commitment to the convergence of inflation to the target in the relevant
horizon and reinforces that the extension of the cycle will reflect the BCB’s legal
mandate.
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D) Monetary policy decision
25. Considering the evolution of the disinflationary process, the assessed scenarios, the
balance of risks, and the broad array of available information, Copom decided to reduce
the Selic rate by 0.50 percentage point, to 12.25% p.a., and judges that this deci sion is
consistent with the strategy for inflation convergence to a level around its target
throughout the relevant horizon for monetary policy, which includes 2024 and 2025.
Without compromising its fundamental objective of ensuring price stability, this
decision also implies smoothing economic fluctuations and fostering full employment.
26. The current context, characterized by a stage in which the disinflationary process
tends to be slower, with only partial reanchoring of inflation expectations and a
challenging global outlook, requires serenity and moderation in the conduct of
monetary pol icy. The Committee reinforces the need to persist on a contractionary
monetary policy until the disinflationary process consolidates and inflation
expectations anchor around its targets.
27. If the scenario evolves as expected, the Committee members unanimously
anticipate further reductions of the same magnitude in the next meetings, and judge
that this pace is appropriate to keep the necessary contractionary monetary policy for
the disinflationary process. The Committee emphasizes that the total magnitude of the
easing cycle throughout time will depend on the inflation 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.
28. The following members of the Committee voted for a reduction of 0.50 percentage
point: Roberto de Oliveira Campos Neto (Governor), Ailton de Aquino Santos, Carolina
de Assis Barros, Diogo Abry Guillen, Fernanda Magalhães Rumenos Guardado, Gabriel
Muricca Galípolo, Maurício Costa de Moura, Otávio Ribeiro Damaso, and Renato Dias de
Brito Gomes.