BCB COPOM Minutes - Meeting 242
Central bank: bcb | Type: minutes | Date: 2021-10-26

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Minutes of the Meeting of the
Monetary Policy Committee — Copom
October 26-27, 2021
242nd
242nd Meeting
COPOM
October 26-27
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The members of Copom 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 do cument represents
Copom's best effort to provide an English version of its policy meeting minutes. In case of
inconsistency, the Portuguese version prevails.
Date:
October 26-27, 2021
Place: BCB Headquarters’ meeting rooms on the 8th floor – Brasilia – DF – Brazil
Starting and ending
times:
October 26: 10:20 AM – 1:15 PM; 2:40 PM – 6:14 PM
October 27: 2:40 PM – 6:35 PM
In attendance:
Members of Copom Roberto Oliveira Campos Neto – Governor
Bruno Serra Fernandes
Carolina de Assis Barros
Fabio Kanczuk
Fernanda Magalhães Rumenos Guardado
João Manoel Pinho de Mello
Maurício Costa de Moura
Otávio Ribeiro Damaso
Paulo Sérgio Neves de Souza
Department Heads in
charge of technical
presentations (October
Alan da Silva Andrade Mendes – Department of Foreign Reserves
André Minella – Research Department (also present on October 27)
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
(October 27):
Antonio Paulo Pinto Mergulhão – Senior Advisor at the Office of the Deputy Governor for
Monetary Policy
Arnildo da Silva Correa – Head of the Office of Economic Advisor
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
Leonardo Martins Nogueira – Executive Secretary
Olavo Lins Romano Pereira – Deputy Head of the Department of International Affairs
Pedro Henrique da Silva Castro – Deputy Head of the Department of Economics
Rafael Mendonça Travassos Andrezo – Deputy Head of the Governor’s Office
242nd Meeting
COPOM
October 26-27
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A) Update of economic outlook and Copom’s baseline scenario 1
1. Regarding the global outlook, the environment is becoming less favorable, reflecting
the persistent inflation and the consequent central banks’ reaction. Growth in 2022
should be lower, with the reversal of fiscal stimuli and advance in the process of
monetary policy normalization. This combination implies a more challenging scenario
for emerging markets.
2. Turning to the Brazilian economy, recently released industrial output and trade
indicators show negative and below -expected results. On the other hand, the services
segments hardest hit by the pandemic continue on a robust recovery trajectory. The
Committee maintained the expectation of a recovery in activity in the second half of
the year, although less intense and more concentrated in the services sector . This
reassessment reflects the impact of supply shortages of inputs in some productive
chains, which should persist until 2022.
3. For 2022, if on the one hand the rise in risk premia and the tightening of financial
conditions act stifling the economic activity, on the other Copom considers that
economic growth will be benefited by three tailwinds: the continued recovery of the
labor market and the services sector; the performance of sectors less dependent on the
business cycles – such as agriculture and li vestock and the extractive industry; and the
remaining effects of the normalization of the economy as the health crisis recedes.
4. Consumer inflation remains high and has been more persistent than anticipated.
Price increases are more widespread and also include items more associated with
core inflation. The increase of industrial prices has not slowed down and should persist
in the short term, whereas services inflation accelerated due to the gradual
normalization in the sector’s activity, as expected. Besides these developments, since
the previous Copom meeting there has been a substantial increase in international
energy commodity prices, whose inflationary impact is amplified by the BRL
depreciation. Combined, they are the preponderant factor for the increase in the
Committee's inflation projections for both 2021 and 2022.
5. The various measures of core inflation are above the range compatible with meeting
the inflation target. Inflation expectations for 2021, 2022, and 2023 collected by the
Focus survey are around 9.0%, 4.4%, and 3.3%, respectively.
6. Copom's inflation projections in its baseline scenario, with interest rate path
extracted from the Focus survey and exchange rate starting at USD/BRL 5.60 2 and
evolving according to the purchase power parity (PPP), stand around 9.5% for 2021,
4.1% for 2022, and 3.1% for 2023. This scenario assumes a path for the Selic rate that
rises to 8.75% p.a. in 2021 and to 9.75% p.a. in 2022, ending the year at 9.50% p.a., and
drops to 7.00% p.a. during 2023. In this scenario, inflation projections for administered
prices are 17.1% for 2021, 5.2% for 2022, and 5.1% for 2023. The energy flag is assumed
to be “water scarcity” in December 2021 and “red level 2” in December of 2022 and
2023.
B) Risks around the baseline inflation scenario
7. The Copom’s baseline scenario for inflation encompasses risk factors in both
directions.
8. On the one hand, a possible reversion, even if partial, of the recent increase in the
price of international commodities measured in local currency would produce a lower -
than-projected inflation in the baseline scenario.
1 Unless explicitly stated otherwise, this update takes into account changes that occurred since the
September Copom meeting (241st 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.
242nd Meeting
COPOM
October 26-27
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9. On the other hand, further extensions of fiscal policy responses to the pandemic that
increase aggregate demand and deteriorate the fiscal path may pressure the country's
risk premium.
10. Despite the more positive public accounts data, the Committee assesses that recent
questioning regarding the fiscal framework increased the risk of deanchoring inflation
expectations, raising the upward asymmetry in the balance of risks. This implies a higher
probability of inflation paths above the one projected under the baseline scenario.
C) Discussion about the conduct of monetary policy
11. The public accounts have performed better than expected. Assuming the current
fiscal framework is maintained, in particular the control of spending growth, Copom's
projections foresee a falling trajectory for the public debt as a percentage of GDP.
However, between Copom's meetings, relevant questionings arose regarding the
future of the current fiscal framework, resulting in higher risk premia. These
questionings have also raised the risk of deanchoring inflation expectations, increasing
the upward asymmetry in the balance of risks for the conduct of monetary policy. This
implies assigning greater probability to alternative scenarios that consider higher
neutral interest rates.
12. The Committee reiterates that the process of reforms and necessary adjustments
in the Brazilian economy is essential for a sustainable economic growth. Weaknesses in
the structural reform effort and permanent changes to the fiscal consolidation process
could result in an increase in the structural interest rate.
13. Next, Copom discussed the implementation of monetary policy, considering not
only the baseline scenario, but also the balance of risks for inflation. According to the
baseline scenario, which uses the interest rate path extracted from the Focus survey
and the exchange rate at purchase power parity, the inflation projections are above the
target for 2022 and around the target for 2023. The Committee pondered that the
asymmetry in the balance of risks resulting from the developments in the fiscal scenario
implies an increase in the upward risk to its baseline scenario projections and assessed
that this upside bias is now larger than previously considered. Therefore, the
Committee concluded that the appropriate degree of monetary tightening is
significantly more contractionary than that used in the baseline scenario.
14. In view of this, Copom assessed the appropriate pace of interest rate hikes. To this
end, it analyzed the convergence of inflation to targets using simulations with different
monetary policy paths under different alternative scenarios. The Committee pondered
that, at this moment, shocks in BRL-denominated commodity prices already impact the
2022 projections, raising their volatility. Nevertheless, Copom understands that a
process of deanchoring inflation expectations may cause high economic costs in the
long term and thus decided to choose a pace of interest rate hikes compatible with the
convergence of inflation to the target still in 2022.
15. The Committee also considered scenarios with adjustments greater than 1.50 p.p.
The prevailing view, however, was that monetary policy tightening paths with 1.50 p.p.
steps, considering different ending rates, are consistent with inflation converging to
the target in 2022, even considering the current asymmetry of the balance of risks.
242nd Meeting
COPOM
October 26-27
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D) Monetary policy decision
16. Taking into account the baseline scenario, the balance of risks, and the broad array
of available information, the Copom unanimously decided to increase the Selic rate by
1.50 p.p. to 7.75% p.a. The Committee judges that this d ecision reflects its baseline
scenario for prospective inflation, a higher -than-usual variance in the balance of risks,
and it is consistent with convergence of inflation to the targets over the relevant
horizon for monetary policy, which includes 2022 and 2023. Without compromising its
fundamental objective of ensuring price stability, this decision also implies smoothing
of economic fluctuations and fosters full employment.
17. The Committee considers that, given the deterioration of the balance of risks and
the increase in its inflation projections, this pace is the most appropriate to guarantee
inflation convergence to the targets at the relevant horizon. At this moment, the
Copom’s baseline scenario and balance of risks indicate as appropriate to advance the
process of monetary tightening even further into the restrictive territory.
18. For the next meeting, the Committee foresees another adjustment of the same
magnitude. Copom emphasizes that its future policy steps could be adjusted to ensure
the achievement of the inflation target and will depend on the evolution of economic
activity, on the balance of risks, and on inflation expectations and projections for the
relevant horizon for monetary policy.
19. The following members of the Committee voted for this decision: Roberto Oliveira
Campos Neto (Governor), Bruno Serra Fernandes, Carolina de Assis Barros, Fabio
Kanczuk, Fernanda Magalhães Rumenos Guardado, João Manoel Pinho de Mello,
Maurício Costa de Moura, Otávio Ribeiro Damaso, and Paulo Sérgio Neves de Souza.