BCB COPOM Minutes - Meeting 256
Central bank: bcb | Type: minutes | Date: 2023-08-01

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Minutes of the Meeting of the
Monetary Policy Committee — Copom
August 1-2, 2023
256th
256th Meeting
COPOM
August 1-2
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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:
August 1-2, 2023
Place: BCB Headquarters’ meeting rooms on the 8 th floor (8/1 and 8/2 on the morning)
and 20th floor (8/2 on the afternoon) – Brasilia – DF – Brazil
Starting and ending
times:
August 1: 10:08 am – 12:21 pm; 2:13 pm – 6:23 pm
August 2: 11:07 am – 12:41 pm; 2:25 pm – 6:45 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 8/1 and on the
morning of 8/2):
Alan da Silva Andrade Mendes – Department of Foreign Reserves
André Minella – Research Department (also present on the afternoon of 8/2)
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 (present
on the mornings of 8/1 and 8/2)
Other participants
(attending on 8/1 and on
the morning of 8/2):
Arnildo da Silva Correa – Head of the Office of Economic Advisor
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
Gilneu Francisco Astolfi Vivan – Head of the Financial System Monitoring Department
Isabela Ribeiro Damaso Maia – Head of the Sustainability and International Portfolio Investors
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
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
Renato Baldini Junior – Head of the Department of Statistics
Ricardo Eyer Harris – Head of Office of the Deputy Governor for Regulation
Ricardo Franco Moura – Head of the Prudential and Foreign Exchange Regulation Department
(present on 8/1)
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A) Update of economic outlook and Copom’s scenario1
1. The global environment remains uncertain, with some disinflation at the margin but
with still high core inflation , gradual slowdown in economic activity, and resilience in
the labor market of many countries. At the same time, the central banks of major
economies remain committed to bringing inflation back to its targets, either by
continuing their monetary tightening cycles or by signaling a prolonged period of high
interest rates to fight inflationary pressures. This stance continues to call for greater
caution in the conduct of economic policies, particularly by emerging countries.
2. Regarding the domestic scenario, the recent set of indicators suggests a scenario of
gradual deceleration of activity. Apart from the strong performance of agriculture,
concentrated in the first quarter, the pace of activity growth continues to corroborate
the scenario anticipated by the Committee. In general, there is some retraction in the
trade sector, stability in industry and some accommodation in the services sector, after
a stronger growth pace in previous quarters. The labor market remains resilient but with
some moderation at the margin.
3. Consumer inflation continues to show more benign current dynamics, particularly in
industrial goods and food components. Although the inflation of the components more
sensitive to the economic cycle and the monetary policy, which have greater inflationary
inertia, declined, they remain above the inflation target. Inflation expectations for
2023, 2024, and 2025 collected by the Focus survey have reduced and are around 4.8%,
3.9%, and 3.5%, respectively.
B) Scenarios and risk analysis
4. In the reference scenario, the interest rate path is extracted from the Focus survey,
and the exchange rate starts at USD/BRL 4.752 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 4.9% for 2023, 3.4%
for 2024, and 3.0% for 2025. Inflation projections for administered prices are 9.4% for
2023, 4.6% for 2024, and 3.5% for 2025.
5. The Committee evaluates that the international outlook is uncertain. The Committee
noted the resilience of activity and the labor market in advanced economies, even if
some moderation is observed at the margin, as well as lower growth projection for the
Chinese economy. In this context some members see a mild moderation in activity in
major economies as more likely, although a sharper slowdown is not ruled out. A
disinflation process at the margin is observed, reflecting the slowdown of commodity
pressures a fter the initial impacts of the war in Ukraine and the normalization of
productive sectors, but with a slow decline in core inflation. Looking ahead,
uncertainties remain about the global inflation dynamics. The downward movement in
commodity prices has stalled in the recent period , and risks related to weather
phenomena, the war in Ukraine, and international oil pricing policy suggest the
possibility of renewed supply -side inflationary pressures. Furthermore, it is observed
resilience of the labor market and tight output gap in advanced economies, in an
environment of still pressured services inflation in several economies. Thus, central
banks remain committed to control inflation by maintaining tighter monetary policy 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 process. Moreover, the
1 Unless explicitly stated otherwise, this update takes into account changes that occurred since the June
Copom meeting (255th 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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Committee considered that the synchronization of contractionary monetary policy may
have a larger-than-expected impact on the global output gap and on the disinflation
process. The larger-than-expected upward impact on inflation of the synchronization of
expansionary fiscal and monetary policies across countries during the pandemic was
mentioned again.
6. Growth data for Brazil remain consistent with the reference scenario of moderating
activity anticipated by the Committe e. The process of rebalancing the consumption
basket, and, consequently, relative prices, between goods and services continues, with
moderation in the consumption of goods in favor of greater demand in the services
segment. However, the services sector has been moderating in recent months. In
addition, more timely data continue to suggest that the pace of economic growth is in
line with the Committee's expectations. Again, an in-depth discussion of developments
in the labor market took place. Some members s till consider that there is a recent
moderation in the labor market, which points to the slowdown in the pace of hirings in
the formal market and the decline in the participation rate. Other members emphasized
the drop in the unemployment rate and the still high pace of hirings in formal
employment. The Committee agreed that there is no evidence of high wage pressures
in labor negotiations. Some members noted that the recent process towards a partial
recomposition of previous 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.
7. The Committee analyzed different output gap metrics and assumptions, comparing
not only the estimate of the current gap level under different methods, but also their
impacts on the inflation projection. It was noted that the speed with which the gap is
assumed to close over the projection horizon is as important as the initial level assumed
for the gap. It was then discussed the risk that the output gap is tighter than assumed
in the reference scenario, in particular in the labor market, and assessed the impacts of
this alternative assumption on inflation projections. The Committee emphasize s that
the output gap is an unobservable variable, subject to uncertainty in its measurement
and with even greater uncertainty after the pandemic period.
8. The Committee believes that the disinflation dynamics continues to be characterized
by a process with two distinct stages. The first -stage movement proved deeper than
expected, given the more benign dynamics of food and in dustrial prices and the
behavior of wholesale prices. In this regard, the recent dynamics of the exchange rate
and international commodity prices, although with greater volatility, has contributed to
slow down international pressures on inflation in Brazil . On the one hand, this
phenomenon improves the dynamics of the second stage of disinflation, with lower
inertia on core inflation and services inflation. On the other hand, the inherent volatility
of food and industrial goods components suggests the possi bility of abrupt reversals,
recommending caution. In this debate, the risks related to El Niño, which were partially
incorporated into the reference scenario, were mentioned, as were those related to
international oil price developments, which followed the Committee's usual
governance in its assumptions. In the end, it was unanimously concluded that a
contractionary and cautious monetary policy was needed to reinforce the
disinflationary dynamics.
9. Also in the discussion on inflationary behavior, the current stage of the disinflationary
process and the recent behavior of services inflation were discussed in depth. It was
noted that the indicators of this segment point to continuity in the trajectory of
disinflation in the recent period, despite some oscillation at levels still above the value
compatible with the target. In such a discussion, it was emphasized that it is more
relevant to focus on its underlying fundamentals – in particular, possible changes in the
labor market and in the dynamics of activity – than on punctual movements in services
inflation, relative to some component or some period.
10. Inflation expectations have shown partial reanchoring since the previous Copo m
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meeting. The Committee emphasized the credibility gain produced by the June
meeting of the National Monetary Council (CMN), which established the inflation target
for 2026, as well as its tolerance range, at the same values as those for 2024 and 2025
and without revising the targets and ranges previously established for 2023, 2024, and
2025. In addition, the announcement of a change to a continuous target system, with
rules yet to be set out, has reduced uncertainty about the targets for subsequent years,
also contributing to further reanchoring. There fore, there was a positive impact on
inflation expectations immediately after the CMN's decision, reinforcing the
interpretation that the inflation targeting regime has gained credibility.
11. However, the reancho ring is still partial and the Committee discussed again the
reasons for such deanchoring. Members raised several possibilities. The Committee
removed residual uncertainty about the approval of the fiscal framework from its
balance of risks but noted in its discussion that fiscal dynamics remained relevant in its
reference scenario. In particular, some members assessed that some uncertainty
persists among agents about overcoming fiscal challenges, evidenced in primary
balance expectations that diverge from t he targets set by the government, and that
this may also be reflected in unanchored inflation expectations for longer maturities. In
this case, anchoring expectations around the targets set out in the new fiscal
framework, with the maintenance of the fiscal commitment in addition to a reduction
in uncertainties about the tax measures that underpin the implementation of this
objective, would contribute to a faster disinflationary process. Others evaluated that a
global scenario with higher inflation also mak es it difficult to reanchor expectations,
since there is a possibility of external inflation at higher levels for a longer period.
Finally, the hypothesis of the agents’ perception that, over time, the B anco Central do
Brasil (BCB) would become more lenient in fighting inflation was mentioned. Copom
members unanimously understand that, regardless of the BCB’s board composition, the
Institution’s credibility and reputation should be ensured.
12. Copom reminds that structural reforms and the predictability of public accounts are
essential to increase the economy’s productivity, raise the potential growth, and
improve the confidence of business, investors, and households. The lack of
commitment with structural reforms, the increase of earmarked credit grantin g, 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 monetary policy
power and, consequently, on its cost to the economy.
13. 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 resiliency on 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, particularly due to adverse conditions in the global financial
system; and (ii) an impact on global disinflation larger than expected from synchronized
monetary policy tightening.
C) Discussion about the conduct of monetary policy
14. Copom discussed the conduct of monetary policy, considering the set of projections
evaluated, as well as the balance of risks for inflation.
15. The Committee unanimously evaluated that the evolution of the scenario since the
previous meeting has given the necessary confidence to start a gradual cycle of
monetary easing. This evaluation inv olved different dimensions. Firstly, it was
emphasized the positive behavior of inflation expectations following the setting of the
target by the CMN and the announcement of the change to a continuous target system.
The reduction of inflation expectations, as well as of break-even inflation rates, reduces
the cost of disinflation and impacts the ex -ante real interest rate of the economy, as
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previously alerted by Copom. Secondly, headline inflation measures registered a clear
improvement, while services infl ation continues decelerating at the margin. Some
members emphasized the recent dynamics, while others emphasized that the
underlying fundamentals for the dynamics of services inflation do not allow yet to
convincingly extrapolate the recent benign behavior. Regarding the output gap, some
members noted the upward revision in its estimate, and the Committee discussed the
implications of alternative output gap measures from other models and their respective
impacts on projections. Finally, it was observed that the partial reanchoring of
expectations contributed to reduc ing projections in the reference scenario. However,
this movement was counterbalanced by updating some variables in the reference
scenario that affect estimates and projections of th e output gap, so that inflation
projections did not differ significantly from those of the previous meeting. After the
scenario evaluation, all members agreed that it was appropriate to reduce the Selic rate
in this meeting.
16. During the debate, the Committe e judged that both the options of reducing the
Selic rate by 0.25 percentage point or 0.50 percentage point had merit, reinforcing that,
whatever the decision, there was a consensus that a scenario with inflation
expectations with only a partial reanchorin g, core inflation still above the target,
services inflation still above the level compatible with the inflation target, and resilient
economic activity require s a more conservative stance throughout the cycle of
monetary policy easing. Moreover , both opti ons, depending on the cycle undertaken,
would be consistent with the convergence of inflation to the target in the Copom’s
reference scenario and in other scenarios discussed in the meeting.
17. One group was in favor of a more parsimonious interest rate reduction. For this
group, the Committee’s signaling itself already emphasized the caution and parsimony
inherent to this scenario and, according to these members, no relevant changes had
been observed either in the scenario or in Copom's projections that justified the re-
evaluation of this signaling. Other group considered that the monetary policy stance at
a significantly contractionary degree allows the start of the cycle already at the
moderate pace considered for the next meetings, without compromising the
commitment to achieve the target and the credibility of monetary policy. This group
emphasized that some events observed since the previous meeting, as the recent
inflation dynamics more beni gn than expected, the partial reanchoring relatively fast
after the CMN’s target setting, and the adequacy of recalibrating the real interest rate
in view of the inflation expectations movements.
18. Regarding the next steps, Copom members unanimously anticipate d 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 wi th 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 dynamics of
the anticipated inflation in the reference scenario projecti ons. Copom also evaluated
that there is no evidence of an ongoing monetary tightening beyond that necessary for
the inflation convergence to the target, and the scenario still calls for caution,
reinforcing the view of serenity and moderation that Copom has expressed . The
Committee judges that there is low probability of an additional intensification in the
pace of adjustment, since this would require substantial positive surprises that would
raise even further the confidence in the prospective disinflationary dynamics. Such
confidence would arise only with a significant change in the fundamentals of inflation
dynamics, such as a much more solid reanchoring of expectations, a sharp widening of
the output gap, or a services inflation dynamics substantially more benign than the
expected.
19. Finally, the Committee debated the extension of the monetary policy adjustments
cycle. Copom analyzed the projections in the reference scenario, in a scenario of an
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interest rate reduction of 0.50 percentage point in this meeting, and in alternative
scenarios that reflected the balance of risks. It was emphasized, in this analysis, 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 that the extension of the cycle over time 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. 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.
D) Monetary policy decision
20. Considering 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 13.25% 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 inclu des the year of 2024 and, to a lesser extent, 2025. Without
compromising its fundamental objective of ensuring price stability, this decision also
implies smoothing economic fluctuations and fostering full employment.
21. The Committee reinforces the need to persist on a contractionary monetary policy
until the disinflationary process consolidates and inflation expectations anchor around
its targets.
22. Copom considered the alternative option to reduce the Selic rate to 13.50%, but it
concluded that it was appropriate to adopt a 0.50 percentage point pace in this meeting
due to an improvement in the inflation dynamics, reinforcing however the firm
objective of keeping a contractionary monetary policy to reanchor expectations and
bring inflation to the target in the relevant horizon. The current context, characterized
by a stage in which the disinflationary process tends to be slower and with partial
reanchoring of inflation expectations, requires serenity and moderation in the conduct
of monetary policy. If the scen ario evolves as expected, the Committee members
unanimously anticipate further reductions of the same magnitude in the next meetings,
and it judges that this pace is appropriate to keep the necessary contractionary
monetary policy for the disinflationary p rocess. 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 p articular the 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 a reduction of 0.50 percentage
point: Roberto de Oliveira Campos Neto ( Governor), Ailton de Aquino Santos, Carolina
de Assis Barros, Gabriel Muricca Galípolo , and Otávio Ribeiro Damaso. The following
members voted for a reduction of 0.25 percentage point: Diogo Abry Guillen, Fernanda
Magalhães Rumenos Guardado, Maurício Costa de Moura, and Renato Dias de Brito
Gomes.