BCB COPOM Minutes - Meeting 240
Central bank: bcb | Type: minutes | Date: 2021-08-03

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Minutes of the Meeting of the
Monetary Policy Committee — Copom
August 3-4, 2021
240th
240th Meeting
COPOM
August 3-4
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T he 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. T his document represent s
Copom's best effort to provide an English version of its policy meeting minutes. In case of
inconsistency, the Portuguese version prevails.
Date:
August 3-4, 2021
Place: BCB Headquarters’ meeting rooms on the 8 th floor – Brasilia – DF – Brazil
Starting and ending
times:
August 3: 10:19 AM – 1:41 PM; 3:05 PM – 7:11 PM
August 4: 2:30 PM – 6:46 PM
In attendance:
Members of the Copom Roberto Oliveira Campos Neto – Governor
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
(August 3):
Alan da Silva Andrade Mendes – Department of Foreign Reserves
André Minella – Research Department (also present on August 4)
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
(August 3):
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
Julio Cesar Costa Pinto – Head of the Deputy Governor for Monetary Policy’s Office
Leonardo Martins Nogueira – Executive Secretary
Mariane Santiago de Souza – Head of the Governor’s Office
Olavo Lins Romano Pereira – Deputy Head of the Department of International Affairs
Pedro Henrique da Silva Castro – Deputy Head of the Department of Economics
240th Meeting
COPOM
August 3-4
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A) Update of economic outlook and Copom’s baseline scenario1
1. Regarding the global outlook, the evolution of the Covid-19 Delta variant adds risk to
the recovery of the world economy. The Committee considers that, in spite of the
recent movements in the yield curves, there is still a relevant upward inflation risk in the
central economies. Nevertheless, the environment for emerging economies remains
favorable with the long-lasting monetary stimuli, with the fiscal programs, and with the
reopening of the major economies.
2. Turning to the Brazilian economy, recent indicators continue evolving satisfactorily and
do not call for relevant revisions in growth forecasts, which display a robust economic
recovery during the second half of the year.
3. The various measures of underlying inflation are above the range compatible with
meeting the inflation target.
4. Inflation expectations for 2021, 2022, and 2023 collected by the Focus survey are
around 6.8%, 3.8%, and 3.25%, respectively.
5. Consumer inflation has been persistent. Recent indicators show a worse composition.
It is noteworthy the surprise with the underlying services inflation and the continuing
pressure on industrial goods, which cause core measures to rise. Furthermore, there is
new pressure in volatile components, such as the possible additional increase in
electricity fares and food prices, both due to adverse weather conditions. Altogether,
these factors imply significant revisions in short-term forecasts.
6. The Copom's inflation projections in its baseline scenario, with interest rate path
extracted from the Focus survey and exchange rate starting at USD/BRL 5.152, and
evolving according to the purchase power parity (PPP), stand around 6.5% for 2021,
3.5% for 2022 and 3.2% for 2023. This scenario assumes a path for the Selic rate that
rises to 7.0% p.a. in 2021, remains at this level during 2022 and drops to 6.5% p.a. during
2023. In this scenario, inflation projections for administered prices are 10.0% for 2021
and 4.6% for 2022 and 2023. The energy flag is assumed to be neutral, remaining at
"red level 1" in December each year.
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.
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. Despite the recent improvement of debt sustainability indicators, the
elevated fiscal risk creates an upward asymmetry in the balance of risks, i.e., in the
direction of higher -than-expected paths for inflation over the relevant horizon for
monetary policy.
Unless explicitly stated otherwise, this update takes into account changes that occurred since the June
Copom meeting (239
meeting).
Value obtained according to the usual procedure of ro unding the average USD/BRL exchange rate
observed in the five business days ended in the last day of the week prior to the Copom meeting.
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COPOM
August 3-4
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C) Discussion about the conduct of monetary policy
10.Regarding the global outlook, the Committee assessed that the fiscal and monetary
muli are promoting robust growth and that, henceforth, inflation dynamics in central
emerging economies should increasingly depend on demand channels. In this
regard
further discussions about the risk of a lasting inflation increase in the United
States and the associated repricing of financial assets could turn the environment for
emerging economies challenging.
11.The Copom members discussed the evolution of domestic economic activity in light of
available information and indicators. They considered that the latest available data
continues to evolve positively, in line with growth forecasts. In the Committee’s view,
the second half of the year should bring a robust recovery, as the effects of the
accination are felt more broadly. The Committee noticed that the median of growth
forecasts
in the Focus survey is appreciably more optimistic than those of its baseline
scenario and pondered whether the difficulties related to seasonal adjustments due to
pandemic shock would explain this divergence.
12.The Copom members then debated the level of economic slack. Although the
econo
mic slack as a whole is quickly returning to the late 2019 level, the Committee
considered that the pandemic still produces heterogeneous effects on economic
sectors and, in particular, on the labor market, w ith consequences for the recent and
prospe
ctive dynamics of inflation.
3. Next, the Copom discussed the implementation of monetary policy, considering not
ly 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,
exchange rate at purchasing power parity, and commodity prices in USD stable in
terms, the inflation projections are aligned to the targets for 2022 and 2023. The
Committee judged that the fiscal risks continue to imply an upward bias in the
projections.
This asymmetry in the balance of risks affects the appropriate degree of
onetary stimulus, thus justifying a path for monetary policy that is more restrictive
than the one used in the baseline scenario.
14.Copom then evaluated different tightening paths for monetary policy. Considering
the baseline scenario and the balance of risks, the Committee assessed that – s hould
there be no changes in the inflation conditioning factors – subsequent uninterrupted
interest
rate increases are required up to a level above the neutral rate, to obtain
projections around the inflation targets in the relevant horizon. Therefore, a tightening
cycle of the policy rate to a level consistent with restrictive monetary policy has become
appropriate.
The Committee opted to communicate this decision, maintaining
transparency
about the monetary policy path implied in its projections, and reaffirming
that this view will be systematically reassessed as changes in inflation determinants or
in the balance of risks occur.
5. The Committee discussed potential explanations for the difference between its
baseline scenario’s projections and the inflation expectations extracted from the Focus
survey. First, expectations may incorporate different assumptions about the
deter
minants of inflation, such as administered prices and economic growth, as well as
contain different perceptions on risk or alternative scenarios. Second, the long
sequence of shocks and one-way revisions of expectations may increase the perception
of inflationary inertia. Finally, market participants may have different
ssumptions about the reaction function of monetary policy.
16.As a result, Copom evaluated that the recent worsening in inertial components of
inflation, amid the reopening of the service sector, could cause a further
deterioration
in inflation expectations, raising the costs for its future convergence. The
mmittee felt that it should once again underscore its unequivocal commitment to
pursuit of its inflation targets over the relevant horizon for monetary policy, guided by
its baseline scenario as well as its assessment of the balance of risks.
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COPOM
August 3-4
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17. Finally, Copom concluded that a quicker adjustment of monetary policy is the most
appropriate strategy at this time to assure the convergence of inflation to its targ ets
for 2022 and 2023.
D) Monetary policy decision
18. Taking into account the baseline scenario, the balance of risks, and the broad array
of available information, Copom unanimously decided to increase the Selic rate by 1.00
p.p. to 5.25% p.a. The Committee judges that this decision reflects its baseline scenario
for prospective inflation, a higher -than-usual variance in the balance of risks and is
consistent with the convergence of inflation to its target over the relevant horizon for
monetary policy, which includes 2022 and, to a lesser extent, 2023. The adjustment also
reflects the Committee’s perception that the recent deterioration of inertial
components of inflation, in a moment of reopening of the service sector, could result
in an additional deterioration of inflation expectations. The Committee understands
that, at this moment, the strategy of a quicker m onetary adjustment is the most
appropriate to guarantee the anchoring of inflation expectations. Without
compromising its fundamental objective of ensuring price stability, this decision also
implies smoothing of economic fluctuations and fosters full emplo yment.
19. At this moment, the Copom’s baseline scenario and the balance of risks indicate as
appropriate a tightening cycle of the policy rate to a level above the neutral.
20. 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
releva nt horizon for monetary policy.
21. The following members of the Committee voted for this decision: Roberto Oliveira
Campos Neto (Governor), Carolina de Assis Barros, Fabio Kanczuk, Fernanda Magalhães
Rumenos Guardado, João Manoel Pinho de Mello, Maurício Cos ta de Moura, Otávio
Ribeiro Damaso, and Paulo Sérgio Neves de Souza.