BCB COPOM Minutes - Meeting 252
Central bank: bcb | Type: minutes | Date: 2023-01-31

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Minutes of the Meeting of the
Monetary Policy Committee — Copom
January 31 - February 1, 2023
252nd
252nd Meeting
COPOM
Jan. 31 - Feb. 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. 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:
January 31 - February 1
Place: BCB Headquarters’ meeting rooms on the 8 th floor (1/31 and 2/1 on the morning)
and 20th floor (2/1 on the afternoon) – Brasilia – DF – Brazil
Starting and ending
times:
January 31: 10:13 AM – 11:51 AM; 2:24 PM – 5:47 PM
February 1: 10:11 AM – 11:22 AM; 2:32 PM – 6:34 PM
In attendance:
Copom Members Roberto de Oliveira Campos Neto – Governor
Bruno Serra Fernandes
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 1/31 and
on the morning of 2/1):
Alan da Silva Andrade Mendes – Department of Foreign Reserves
André Minella – Research Department (also present on the afternoon of 2/1)
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 1/31 and
on the morning of 2/1):
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
Gustavo Andrade Barbosa de Souza – Deputy Head of the Open Market Operations Dept.
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
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
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A) Update of economic outlook and Copom’s scenario1
1. The global environment continues to be marked by prospects of below- potential
global growth for next year. The easing of the COVID policy in China, a milder winter in
Europe, and the possibility of a gradual decline in the US growth soften the expected
global economic slowdown for the coming quarters due to the tightening of financial
conditions in major economies.
2. The inflationary environment remains challenging, but recent data suggest some
moderation at the margin in several countries. There is a normalization in supply chains
and an accommodation in the prices of major commodities in the recent period, leading
to a moderation in goods-related inflationary pressures. Conversely, the low degree of
labor market slack in some economies, associated with a high current inflation and a
high degree of inflation diffusion, suggests that inflationary pressures on the services
sector should last longer.
3. The process of normalization of monetary policy in advanced economies continues
towards restrictive rates synchronized across countries, tightening financial conditions
and impacting economic growth expectations. A long -lasting period of high interest
rates is foreseen after the process of increasing interest rates, which calls for greater
caution in the conduct of economic policies also by emerging economies
4. Regarding the Brazilian economy, the set of indicators released since the previous
Copom meeting continues to be in line with the scenario of deceleration expected by
the Committee. It was observed that confidence indicators dropped and industrial
production, trade, and services indicators downturned . The labor market, which
surprised positively throughout 2022, still shows signs of deceleration, with a decline in
net hirings in New CAGED and some stability in the unemployment rate stemming from
setbacks in the employed population and the workforce.
5. Notwithstanding the slowdown at the margin, consumer inflation remains high. The
inflation of the components more sensitive to the economic cycle and the monetary
policy, which present greater inflationary inert ia, remain above the range compatible
with meeting the inflation target, albeit showing some marginal moderation. Inflation
expectations for 2023 and 2024 collected by the Focus survey are around 5.7% and
3.9%, respectively.
B) Scenarios and risk analysis
6. In the reference scenario, the interest rate path is extracted from the Focus survey,
and the exchange rate starts at USD/BRL 5.152 and evolves according to the purchasing
power parity (PPP). The Committee assumes that oil pr ices 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 “yellow” in December 2023 and
2024. In this scenario, Copom’s inflation projections st and at 5.6% for 2023 and 3.4%
for 2024. Inflation projections for administered prices are 10.6% for 2023 and 5.0% for
2024. The Committee decided again to emphasize the six -quarter-ahead horizon. On
this horizon, which refers to 2024Q3, the 12-month inflation projection stands at 3.6%.
The Committee judges that the uncertainty in its assumptions and projections is higher
than usual.
7. The Committee analyzed an alternative scenario with stable interest rates
throughout the entire relevant horizon. In this scenario, Copom’s inflation projections
stand at 5.5% for 2023, 3.1% for 2024Q3, and 2.8% for 2024.
1 Unless explicitly stated otherwise, this update takes into account changes that occurred since the December
Copom meeting (251st 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.
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8. The Committee evaluated different assumptions, parameters, and scenarios in its
discussion of inflation projections. On this subject, some members evaluated th e
possibility of incorporating some increase in the neutral interest rate, towards the
movement observed in longer -term inflation expectations extracted from the Focus
survey. The Committee chose, at this point, to maintain the neutral interest rate at 4%,
but evaluated alternative scenarios and identified that the impacts on its projections of
an increase in the neutral rate grow over time and become more relevant as of the
second half of 2024.
9. Copom assesses that the scenario for prospective global growth looks a little less
challenging as a result of the change in China's COVID policy and of the mild winter in
Europe. Some members emphasized that economic activity and labor market data
remain relatively resilient in the US. In China, the adjustments in sanitary restrictions
should lead to a cyclical recovery in demand and a reduction in the risks of supply
disruptions. However, the Committee assesses that the Chinese long -term growth is
expected to remain lower than observed in the pre- pandemic period, r eflecting both
the adjustments in the real estate sector and the worsened demographics expected in
the coming years. In Europe, the milder winter has also reduced the likelihood of
extreme scenarios in energy supply. In the US, economic activity data have been
pointing to deceleration, but still in an environment of very pressured labor market.
Despite these short -term developments, the Committee continues to assess that the
commitment and determination of central banks to reduce inflationary pressures and
anchor expectations consolidate a global scenario of tightening of financial conditions
for a longer period , with rates at the end of the tightening cycle maintained for a
sufficiently long period at contractionary levels, raising the risk of a more pronounced
global deceleration.
10. The Committee continues to assess that the process of global disinflation,
especially regarding core inflation indicators, is challenging and will possibly happen
more slowly than usually observed, since inflation is widespr ead in the services
segment. However, some members highlighted the deceleration in the measures of
core inflation in several countries.
11. Data on economic activity in Brazil continues to indicate a more moderate pace of
marginal growth and employment data suggest a loss of dynamism. Some members
observed a movement towards partial recomposition of recent real wages losses, but
judge that this movement is expected and is coupled with a deceleration in nominal
gains that is expected to intensify ahead. The Committee will continue to monitor the
labor market releases, continuously assessing the role of lagged inflation and labor
market pressures on wage adjustments. The set of released data, including the drop in
confidence indicators and the deceleration in credit grants, together with the lagged
effects of monetary policy, reinforce the Committee's expectation of a slowdown in the
pace of economic activity, which should worsen over the coming quarters.
12. The Committee noted with particular concern the deterioration in longer -term
inflation expectations. Such deterioration may have happened for several reasons,
among them a possible perception of the Banco Central do Brasil ( BCB) leniency with
the targets set by the National Monetary Council (CMN), an expansionary fiscal policy
that pressures the aggregate demand over the projection horizon, or the possibility of
changes in the inflation targets already set.
13. In the first case, the BCB reaffirms its commitment to conduct monetary policy to
achieve the established targets and assesses that, once the deanchoring is observed, it
is necessary to remain even more vigilant in the conduct of monetary policy to reanchor
expectations and thus reduce the future cost of the disinflation.
14. In the second case, the Committee considers that demand stimuli should be
assessed in view of the stage of the economic cycle and the degree of slack in the
economy, with monetary policy being the macroeconomic adjustment variable used to
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mitigate any inflationary effects of the fiscal policy.
15. Finally, regarding the third case, the BCB conducts monetary policy based on the
targets set by the CMN. In summary, more important than analyzing the motivations for
the rise in expectations, the Committee emphasizes that it will act to ensure that
inflation converges to the targets.
16. The Committee also discussed the impacts of the fiscal scenario on inflation. In this
discussion, it was again emphasized that the net effect of the conduct of fiscal policy
on inflation is very dependent on the prevailing macroeconomic and financial
conditions. Thus, by analyzing the multiple channels, including the movement in
financial conditions arising from future interest rates, and updating the assumptions for
the fiscal path to incorporate the sanctioned budget for 2023, the Committee assesses
that the scenario for activity has not changed significantly. Some members have noted
that the median projections of the Pre -Copom Questionnaire (PCQ) and the Focus
survey for the 2023 primary deficit are much lower than that estimated in the federal
budget, possibly incorporating the fiscal package announced by the Ministry of Finance.
Copom sustained its usual governance of incorporating the policies already sanctioned
by law, but it acknowledges that the implementation of the proposed fiscal package
could reduce the upside inflation risk.
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; (ii) the still
heightened uncertainty about the country's future fiscal framework and fiscal stimuli
that support aggregate demand, partially incorporated in inflation expectations and
asset prices; and (iii) an output gap tighter than the one currently adopted by the
Committee in its reference scenario, especially in the labor market. 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; and (iii) the continuity of tax cuts assumed to
be reversed in 2023.
18. The current scenario, particularly uncertain on the fiscal side and with inflation
expectations drifting away from the inflation target on longer horizons, calls for greater
attention in the conduct of monetary policy. The Committee judges that this scenario
raises the cost of the disinflation that is needed to reach the targets established by the
CMN. In this scenario, Copom reaffirms its commitment to set monetary policy to meet
the targets.
C) Discussion about the conduct of monetary policy
19. Copom discussed the conduct of monetary policy, considering the set of projections
evaluated, as well as the balance of risks for inflation.
20. The Committee decided again to emphasize the six -quarter-ahead horizon for its
projections but anticipates that, for the next quarter, it will resume adopting the usual
horizon, according to the calendar years, since the six -quarter ahead horizon will
coincide with the calendar year of 2024, and then there will be no direct effect of the
tax changes in the usual horizon.
21. The Committee began its debate by evaluating whether the previously outlined
strategy of stable interest rates would be sufficient for the convergence of inflation to
its targets. For this purpose, Copom analyzed the main determinants of the inflation
trajectory and how they behaved more recently.
22. Starting with the output gap, a deceleration in economic activity, credit, and more
recently in the labor market was observed, as expected by the Committee given the
monetary policy lags. In this regard, some members stressed that the deceleration
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should c ontinue, and it is necessary for the monetary policy channels to act and for
inflation to converge to its targets. It was also noted that economic growth prospects
have not changed significantly in the recent period.
23. Services inflation has moderated but re mains at a level not compatible with the
target. The Committee focus es on services inflation since it responds to inflationary
inertia and economic activity more directly, and both factors are expected to put less
inflationary pressures over the horizon. In any case, this dimension continues to call for
attention, and the Committee continues to evaluate the speed with which the
convergence process will take place.
24. In the balance of risks, global inflationary pressures have eased, but there is still high
uncertainty about the deceleration of the inflation process, which tends to be non-
linear. The risks are likely to persist as long as a tight labor market is observed in several
advanced economies. Concerning domestic risks, two sets of risks intersect on fi scal
issues. Firstly, the fiscal framework revision reduces the visibility on public accounts for
the coming years, introduces premia on asset prices, and impacts inflation expectations.
Secondly, concerning fiscal stimuli, Copom will continue to monitor t heir impact on
economic activity and inflation and reinforces that, in an environment of a narrowed
output gap, the impact on inflation tends to outweigh the desired impact on activity.
Some members noted that the implementation of the Ministry of Finance fiscal package
should mitigate the fiscal risk and consider that it will be important to monitor the
challenges for its implementation. Finally, the risk of a tighter- than-evaluated output
gap persists, and the Committee will continue to assess data and mo dels for a more
thorough understanding.
25. Regarding downside inflation risks, international commodity prices in local currency
have reduced, but the Committee assesses that the risk of a sharper slowdown in global
economic activity remains on the horizon , despite this risk is to some degree reduced
by China's reopening process. In this regard, the Committee will continue to monitor,
on the one hand, the process of withdrawal of fiscal and monetary stimulus in advanced
economies and, on the other hand, the Chinese reopening process.
26. Regarding inflation expectations, the Committee notes with concern the recent
movement at longer horizons. In addition to the direct impact of the rise in expectations
on inflation projections, the rise in long -term expectations r aises the cost of the
disinflation by requiring greater participation of consequently, a wider output gap to obtain the same fall in inflation. The Committee
will remain vigilant and will persist until the anchoring of expectations is consolidated.
27. Copom’s projections have risen due to the increase in both administered and
market prices. Among the preponderant factors for increased projections, the rise in
Focus survey inflation expectations stands out. Projections conditioned by the
assumptions of the reference scenario do not show convergence to the target over the
relevant monetary policy horizon, but the introducti on of a more extended monetary
tightening, as in its alternative scenario, generates a relevant impact on the projections
toward convergence to the targets.
28. Copom chose to maintain the interest rate, reinforcing the need to evaluate, over
time, the cumulative impacts to be observed of the intense and timely monetary policy
cycle already undertaken. Therefore, the Committee assessed that, given the data
released, the inflation projections and expectations, the balance of risks, and the lagged
effects of the monetary policy already in significantly contractionary territory, it was
appropriate to maintain the interest rate at the level of 13.75% p.a. The Committee
reinforced that it is necessary to remain vigilant, assessing if the strategy of maintaining
the Selic rate for a longer period than in the reference scenario will be enough to ensure
the convergence of inflation.
29. The Committee emphasizes that it will persist until the disinflationary process
consolidates and inflation expectations anchor around its targets, which have shown
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deterioration at longer horizons since the previous meeting. The Committee
emphasizes that it will not hesitate to resume the tightening cycle if the disinflationary
process does not proceed as expected.
D) Monetary policy decision
30. 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. The
Committee judges that this decision reflects the uncertainty around its scenarios for
prospective inflation, an even higher -than-usual variance in the balance of risks and is
consistent with the strategy for in flation convergence to a level around its target
throughout the relevant horizon for monetary policy, which includes 2023 and, to a
larger degree, 2024. Without compromising its fundamental objective of ensuring price
stability, this decision also implies smoothing economic fluctuations and fostering full
employment.
31. The Committee remains vigilant, assessing if the strategy of maintaining the Selic
rate for a longer period than in the reference scenario 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, which have shown deterioration at longer horizons since the previous meeting.
The Committee reinforces that future monetary policy steps can be adjusted and will
not hesitate to resume the tightening cycle if the disinflationary process does not
proceed as expected.
32. The following members of the Committee voted for this dec ision: Roberto de
Oliveira Campos Neto (Governor), Bruno Serra Fernandes, Carolina de Assis Barros,
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.