BCB COPOM Minutes - Meeting 267
Central bank: bcb | Type: minutes | Date: 2024-12-10

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Minutes of the Meeting of the
Monetary Policy Committee — Copom
December 10-11, 2024
267th
267th Meeting
COPOM
December 10-11
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Date:
December 10-11, 2024
Place: BCB Headquarters’ meeting rooms on the 8 th floor (12/10 and 12/11 on the
morning) and 20th floor (12/11 on the afternoon) – Brasilia – DF – Brazil
Starting and ending
times:
December 10: 10:09 AM – 11:50 AM; 2:55 PM – 6:15 PM
December 11: 10:12 AM – 11:17 AM; 2:37 PM – 6:33 PM
In attendance:
Copom Members Roberto de Oliveira Campos Neto – Governor
Ailton de Aquino Santos
Carolina de Assis Barros
Diogo Abry Guillen
Gabriel Muricca Galípolo
Otávio Ribeiro Damaso
Paulo Picchetti
Renato Dias de Brito Gomes
Rodrigo Alves Teixeira
Department Heads in
charge of technical
presentations (attending
on 12/10 and on the
morning of 12/11):
Alan da Silva Andrade Mendes – Department of Foreign Reserves
André Minella – Research Department (also attending on the afternoon of 12/11)
André de Oliveira Amante – Open Market Operations Department
Marcelo Antonio Thomaz de Aragão – Department of International Affairs
Ricardo Sabbadini – Department of Economics
Rogério Antônio Lucca – Department of Banking Operations and Payments System (attending on
12/10)
Other participants André Maurício Trindade da Rocha – Head of the Financial System Monitoring Department
(attending on 12/10 and Arnaldo José Giongo Galvão – Press Office Advisor
on the morning of 12/11): Arnildo da Silva Correa – Head of Office of the Economic Advisor
Cristiano de Oliveira Lopes Cozer – General Counsel
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
Gustavo Andrade Barbosa de Souza – Deputy Head of the Open Market Operations Dep.
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 (attending on 12/10)
Mariane Santiago de Souza Nogueira – Head of the Governor’s Office
Olavo Lins Romano Pereira – Deputy Head of the Department of International Affairs
Paulo Marcelo Cavalcanti Muniz – Head of the Prudential and Foreign Exchange Regulation
Department
Renato Kiyotaka Uema – Deputy Head of the Financial System Regulation Department
Ricardo Eyer Harris – Head of Office of the Deputy Governor for Regulation
Saulo Benchimol Bastos – Coordinator at the Department of Banking Operations and Payments
System
Simone Miranda Burello – Advisor in the Office of the Deputy Governor for Monetary Policy
Copom members analyzed the recent performance and prospects for the Brazilian and
international economies, under the monetary policy framework, whose objective is to achieve the
inflation targets set by the National Monetary Council.
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A) Update of the economic outlook and the Copom’s scenario 1
1. The global environment remains challenging, due mainly to the economic outlook in
the United States, which poses questions about the pace of economic deceleration,
disinflation and, consequently, about the Fed's monetary policy stance.
2. The central banks of major economies remain committed to bringing inflation back
to its targets in a context characterized by labor market pressures. The Committee
judges that the external environment continues to require caution from emerging
market economies.
3. Regarding the domestic scenario, the set of indicators on economic activity and labor
market continues to exhibit strength, as observed in the recent release of GDP, which
suggests a further widening of the output gap.
4. Headline inflation and measures of underlying inflation are above the inflation target
and have increased in recent releases. Inflation expectations for 2024 and 2025
collected by the Focus survey increased significantly and hover around 4.8% and 4.6%,
respectively.
B) Scenarios and risk analysis
5. The inflation outlook has turned more challenging in several dimensions. The
Committee initially analyzed economic activity, aggregate demand, inflation
expectations, current inflation, and the international scenario. Copom then discussed
inflation projections and expectations before deliberating on the current decision and
future communication.
6. Looking at the current economic activity period, a scenario of resilient activity persists
with greater -than-expected dynamism, as shown in the third quarter GDP release,
leading to a new reassessment of a more positive gap. The labor market also continues
to heat up, with an increase in the employed population, a drop in the unemployment
rate, and increased jobs formalization. Nevertheless, there has been some moderation
in the pace of wage growth in different surveys, despite remaining at a high level. The
combination of a robust labor market, expansionary fiscal policy, and vigorous broad
credit granting continue to support consumption and, consequently, aggregate
demand. In particular, the pace of growth in household consumption and gross fixed
capital f ormation indicates that domestic demand is growing at a fairly strong pace,
despite the tightening monetary policy. The Committee discussed the reasons for this
dichotomy. It has been noted that there are mitigating elements concurrent with the
impact of monetary policy on activity, such as stronger-than-anticipated credit and fiscal
stimuli. Maintaining unobstructed the monetary policy channels, with no elements
mitigating their action, contributes to a more effective and efficient conduct .
7. However, regarding prospective activity, there are elements that suggest a
slowdown, such as the tightened financial conditions. In any case, the Committee points
out that the economy has been surprisingly resilient. The Committee will monitor this
process, understanding that the reduction in the output gap forecast in its projections
is inherent to the orderly functioning of the transmission mechanisms and the
achievement of the inflation target. In addition to the uncertainty about the
deceleration process, the question of whether the expected slowdown is due to a
restriction in production factors or a drop in demand is still under debate, with highly
different impacts on the inflationary process.
8. Along with activity, the credit and, mainly, capital markets have also surprised
throughout the year, with volume growth above what was expected, despite high
interest rates. It should be noted that, despite the resilience of activity, an environment
1 Unless explicitly stated otherwise, this update considers changes since the November Copom meeting (266th
meeting).
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of high interest rates, with high levels of delinquency and income commitment, requires
additional caution and diligence when granting credit.
9. Financial conditions and the exchange rate have undergone a sharp change recently.
The combination of a more depreciated exchange rate with the rise in the nominal and
real interest rate curves makes the environment more complex. It was recalled that the
pass-through of the exchange rate to prices increases when demand is stronger,
expectations are deanchored, or the exchange rate path is considered more persistent.
The Committee should therefore monitor more closely how the exchange rate and
financial conditions are transmitted to prices and activity.
10. Regarding the economic policy more broadly, the Committee remained firmly
convinced that policies must be predictable, credible, and counter-cyclical. In particular,
slowdowns are an essential part of the process of smoothing and rebalancing the
economy. T he Committee's debate once again highlighted the need for harmonious
fiscal and monetary policies.
11. The perception of agents about the recent fiscal announcement has significantly
impacted asset prices and expectations, especially the risk premium, inflation
expectations, and the exchange rate. In fact, inflation expectations, measured by
different instr uments and obtained from different groups of agents, rose in all time
horizons, indicating further deanchoring. It is notable that both the inflation premium
embedded on financial instruments and inflation expectations rose in the period,
making the inflat ion scenario more adverse and requiring a more contractionary
monetary policy. Deanchoring inflation expectations is a factor of discomfort shared by
all Committee members and must be tamed.
12. Short-term inflation scenario has deteriorated. Food prices have risen significantly,
due to, among other factors, the drought observed throughout the year and the rise in
beef prices, also affected by the cattle cycle. This increase tends to spread over the
medium-term given the presence of important inertial mechanisms in the Brazilian
economy. Regarding industrialized goods, the recent exchange rate movement has
pressured prices and margins, suggesting a greater increase in these components in the
coming months. Finally, services inflation, which has greater inertia, remains above the
level required to meet the inflation target in a context of dynamic activity and has
increased in the most recent readings. In fact, there has been not only an interruption
in the disinflationary process, but also a greater inflationary pressure in the latest
readings. Copom emphasized that the inflationary drivers have intensified since the
previous meeting, such as the more positive output gap, the even more dynamic labor
market, the additional exchange rate depreciation, higher current inflation, and more
deanchored inflation expectations, making the convergence of inflation to the target
more challenging.
13. The external environment remains challenging, with significant economic and
geopolitical uncertainties. Regarding the U.S., uncertainty persists about the pace of
disinflation and of the economic activity slowdown. At the same time, the possibility of
changes in the conduct of economic policy also brings additional uncertainty to the
scenario, particularly with possible fiscal stimuli, restrictions on labor supply, and the
introduction of import tariffs. The Committee’s reference scenario continues to be for
a gradual and orderly slowdown of the U.S. economy. The Committee reinforced that
the central banks' commitment to achieving their targets is a fundamental ingredient
in the disinflationary process, corroborated by recent indications o f cautious monetary
easing cycles in several countries. As usual, the Committee will focus on the
transmission mechanisms from the external environment to the domestic inflation
dynamics and their impact on the outlook. Copom also emphasized that a context of
greater global uncertainty and more abrupt exchange rate movements requires greater
caution in the conduct of domestic monetary policy.
14. The Committee discussed the estimates of the neutral interest rate that would be
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used as an assumption for the projections. The neutral rate is an unobservable variable,
subject to great uncertainty in its estimation. Due to the intrinsic uncertainty and the
very nature of the variable, the Committee reinforced that the neutral rate is not a
variable that should be updated very frequently, nor should it have abrupt movements,
except in exceptional cases. In this context, the Committee raised the neutral real
interest rate in its models from 4.75% to 5.00% p.a. and will continue to evalu ate this
assumption.
15. Copom has assessed that the shorter-term determinants, such as the exchange rate
and current inflation, as well as the medium-term determinants, such as the output gap
and inflation expectations have deteriorated. Copom then looked into the projections.
In the reference scenario, the interest rate path is extracted from the Focus survey, and
the exchange rate starts at USD/BRL 5.95
2 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.
Moreover, the energy tariff flag is assumed to be “green” in December of years 2024
and 2025.
16. In the reference scenario, the four -quarter inflation projection for the second
quarter of 2026 is 4.0% (Table 1). Inflation projections for the calendar years 2024 and
2025 are 4.9% and 4.5%, respectively.
17. Copom reinforced its view that the slowdown in structural reform efforts and fiscal
discipline, the increase in earmarked credit, and uncertainties over the public debt
stabilization have the potential to raise the economy's neutral interest rate, with
deleterious impacts on the power of monetary policy and, consequently, on the cost of
disinflation in terms of activity.
18. Due to the materialization of risks, the Committee judges that the scenario is less
uncertain and more adverse than in the previous meeting. Upside inflation risks, such
as the resilience of services inflation, the deanchoring of expectations, and exchange
rate depreciation, have materialized. As a result, a scenario that until then had been
quite uncertain has become more adverse.
19. However, the risks to its inflation scenarios remain tilted to the upside. Among the
upside risks for the inflation outlook and inflation expectations, it should be
emphasized (i) a more prolonged period of deanchoring of inflation expectations; (ii) a
stronger-than-expected resilience of services inflation due to a more positive output
gap; and (iii) a conjunction of internal and external economic policies with an
inflationary impact, for example, through a persistently more depreciated currency.
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 monetary policy tightening.
C) Discussion of the conduct of monetary policy
20. Copom then discussed the conduct of monetary policy, considering the set of
projections evaluated, as well as the balance of risks for prospective inflation.
21. The Committee assessed that a further deterioration in the inflation scenario has
occurred, as reflected in inflation expectations and projections. It concluded that the
shorter-term determinants – such as the exchange rate and current inflation – and the
medium-term determinants – such as the output gap and inflation expectations – have
deteriorated significantly. This worsening calls for an even more contractionary
monetary policy.
2 It corresponds to the rounded value of the average exchange rate observed over the ten working days
ending on the last day of the week prior to the Copom meeting, according to the procedure adopted since
the 258th meeting.
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22. The Committee then unanimously decided to increase the Selic rate by 1.00 p.p. and
to announce that, if the expected scenario confirms, it anticipates an adjustment of the
same magnitude at the next two meetings. In the discussion that led to this decision ,
two dimensions were discussed at length. Firstly, the magnitude of the short - and
medium-term deterioration in the inflation scenario required a more timely policy
action to maintain the firm commitment to converging inflation to the target. Secondly,
several risks have materialized, making the scenario more adverse but less uncertain,
allowing the Committee to have greater visibility and then to provide an indication of
how it anticipated the next decisions.
23. The total magnitude of the tightening cycle will be determined by the firm
commitment of reaching the inflation target and will depend on the inflation dynamics,
especially the components that are more sensitive to economic activity and monetary
policy, on the inflation projections, on the inflation expectations, on the output gap,
and on the balance of risks.
D) Monetary policy decision
24. The current scenario is marked by additional deanchoring of inflation expectations,
an increase of inflation projections, a stronger -than-expected economic activity, and
further widening of the output gap, which requires an even more contractionary
monetary policy.
25. Copom therefore decided to increase the Selic rate by 1.00 p.p. to 12.25% 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. Without
compromising its fundamental objective of ensuring price stability, this decision also
implies smoothing economic fluctuations and fostering full employment.
26. In light of a more adverse scenario for inflation convergence, the Committee
anticipates further adjustments of the same magnitude in the next two meetings, if the
scenario evolves as expected. The total magnitude of the tightening cycle will be
determined by the firm commitment of reaching the inflation target and will depend
on the inflation dynamics, especially the components that are more sensitive to
economic activity and monetary policy, on the inflation projections, on the inflation
expectations, on the output gap, and on the balance of risks.
27. The following members of the Committee voted for this decision: Roberto de
Oliveira Campos Neto (Governor), Ailton de Aquino Santos, Carolina de Assis Barros,
Diogo Abry Guillen, Gabriel Muricca Galípolo, Otávio Ribeiro Damaso, Paulo Picchetti,
Renato Dias de Brito Gomes, and Rodrigo Alves Teixeira.
Table 1
Inflation projections in the reference scenario
Year-over-year IPCA change (%)
Price Index 2024 2025 2026Q2
IPCA 4.9 4.5 4.0
IPCA market prices 5.0 4.5 3.8
IPCA administered prices 4.6 4.5 4.6