BCB COPOM Minutes - Meeting 236
Central bank: bcb | Type: minutes | Date: 2021-01-19

Minutes of the Meeting of the
Monetary Policy Committee — Copom
January 19-20, 2021
236th Meeting
COPOM
January 19-20
2 bcb.gov.br
Date: January 19-20, 2021
Place: BCB Headquarters’ meeting rooms on the 8 th floor – Brasilia – DF – Brazil
Starting and ending
times:
January 19: 10:06 AM – 12h42 PM; 2:41 PM – 6:20 PM
January 20: 2:39 PM – 6:34 PM
In attendance:
Members of the Copom Roberto Oliveira Campos Neto – Governor
Bruno Serra Fernandes
Carolina de Assis Barros
Fabio Kanczuk
Fernanda Feitosa Nechio
João Manoel Pinho de Mello
Maurício Costa de Moura
Otávio Ribeiro Damaso
Paulo Sérgio Neves de Souza
Department Heads in
charge of technical
presentations
(January 19):
Other participants
(January 19):
Alan da Silva Andrade Mendes – Department of Foreig n Reserves
André Minella – Research Department (also present o n January 20)
André de Oliveira Amante – Open Market Operations D epartment
Fabia Aparecida de Carvalho – Department of International Affairs
Fábio Martins Trajano de Arruda – Department of Banking Operations and P ayments Systems
Ricardo Sabbadini – Department of Economics
Arnildo da Silva Correa – Head of the office of Economic Advisor
Eugênio Pacceli Ribeiro – Executive Secretary
Leonardo Martins Nogueira – Head of the Governor’s Office
Pedro Henrique da Silva Castro – Deputy Head of the Department of Economics
Rogério Antônio Lucca – Head of the Deputy Governor for M onetary Policy’s O ffice
Sílvio Michael de Azevedo Costa – Deputy Head of the Department of I nternational Affairs
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 docume nt
represents Copom's best effort to provide an English version of its policy meeting minutes. In
case of inconsistency, the Portuguese version prevails.
236th Meeting
COPOM
January 19-20
bcb.gov.br
A) Update of economic outlook and Copom’s baseline scenario1
1. Regarding the global outlook, the increase in the number of cases and the
emergence of new virus strains are reverting previous mobility gains and should affect
short-term activity. However, new fiscal stimulus in some developed countries and the
rollout of CO VID-19 immunization programs should promote a solid economic recovery
in the medium term. Economic slack and communication of central banks of major
economies suggest that monetary stimuli will last long, resulting in a favorable
environment for emerging economies.
2. Turning to the Brazilian economy, indicators regarding growth at the end of last year
have been better than expected, but they do not capture the effects of the recent
increase in the number of COVID-19 cases. Prospectively, uncertainty about economic
growth remains larg er than usual, especially for the first quarter of this year,
concurrently with the expected unwinding of the emergency transfer programs.
3. The various measures of underlying inflation are in levels above the range compatible
with meeting the inflation target.
4. Inflation expectations for 2021, 2022, and 2023 collected by the Focus survey are
around 3.4%, 3.5%, and 3.25%, respectively.
5. The recent increase in commodities prices and its effects on food and fuel prices
imply an increase in inflation forecasts for the next months. In spite of the stronger
short-term inflationary pressure, the Committee maintains the diagnosis that the
current shocks are temporary, although more persistent than expected. Hence, the
Copom continues to closely monitor the evolution of inflation, in particular core
inflation readings.
6. The Copom's inflation projections in its baseline scenario, with interest rate path
extracted from the Focus survey and exchange rate starting at R$5.35/US$
2, a nd
evolving according to the purchase power parity (PPP), stand around 3.6% for 2021 and
3.4% for 2022. This scenario assumes a path for the Selic rate that ends 2021 at 3.25%
p.a. and rises to 4.75% p.a. in 2022. In this scenario, inflation projections for
administered prices are 5.1% for 2021 and 3.0% for 2022.
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, economic slack may continue to produce a lower-than-expected
prospective inflation trajectory, especially when this slack is concentrated in the service
sector. This risk increases if a slower reversion of the pandemic effects lengthens the
environment of high uncertainty and precautionary savings.
9. On the other hand, an extension of fiscal policy responses to the pandemic that
aggravates the fiscal path or a frustration with the continuation of the reform agenda
may increase the risk premium. The relative increase in the risks of these events implies
an upward asymmetry to the balance of risks, i.e. , in the direction of higher -than-
expected paths for inflation over the relevant horizon for monetary policy.
Unless explicit ly stated otherwise, this updat e takes into acco unt changes occurred since the Decemb er Copom meet ing
meetin g).
2 V alue obtained according to the usual procedure of rounding the average R$/US$ exchange rate observed in the fi ve
business days end ed in the last d ay of the week p rior to the Copo m meeting.
236th Meeting
COPOM
January 19-20
bcb.gov.br
C) Discussion about the conduct of monetary policy
10. Regarding the international environment, the Committee assessed that, on the one
hand, the emergence of new variants of the virus and recent discussions about reflation
in the USA are, respectively, new sources of risk for economic activity a nd a s s et p rices
in emerging countries. On the other hand, this risk is counterbalanced by the rollout of
extensive immunization programs against the COVID-19, new fiscal stimuli in some
developed countries and the communication of central banks of major economies that
monetary stimuli will last long. The Committee judged that, for now, the result of this
set of factors is a favorable environment for emerging economies.
11. The Copom members discussed the evolution of domestic economic activity in light
of the available information and indicators. They evaluated that, despite the partial
reduction in governmental transfer programs, available data for the end of last year
have been positively surprising. However, these data do not capture the effects of the
recent increase in the number of COVID-19 cases. Prospectively, the unpredictability
associated with the pandemic developments, and the necessary adjustment in
government spending from 2021 on, increases the uncertainty about the economic
recovery. The Committee considers that the risks associated with both the pandemic
developments and the expected unwinding of the emergency transfer programs may
lead to a domesti c scenario characterized by more gradualism or even a temporary
reversal of the economic recovery.
12. The Copom members debated on the level of economic slack. The Committee
believes that the pandemic continues to have heterogeneous effects on different
economic sectors. The transfer programs from the government have reduced slack in
the goods sector. Service activities, however, especially those most directly affected by
social distancing, face a greater reduction in demand. Prospectively, the evolution of
these sectoral gaps will depend on the pandemic developments and on the adjustment
in public spending. Some members of the Committee pointed out that labor mark et
data on the formal sector suggest that the overall economic slack has reduced more
rapidly than expecte d.
Most members, however, felt that other labor market data did
not support this conclusion.
13. Next, the Committee discussed the implementation of monetary policy. According
to the forward guidance introduced since its 232 nd meeting the Copom would not
reduce the monetary stimulus as long as three conditions were met. T he Copom has
evaluated that two of these conditions still hold: the fiscal regime has not changed, and
long-term inflation expectations remain anchored. However, the Committee judges
that the third condition no longer holds, as inflation expectations, as well as inflation
projections for its baseline scenario, are sufficiently close to the inflation target over
the relevant horizon for monetary policy. As a consequence, the Committee decided to
drop its forward guidance. Henceforth, monetary policy will follow the usual analysis of
the balance of risks for the prospective inflation.
14. The Copom continued its analysis, considering not only the baseline scenario, but
also the balance of risks for inflation. According to the baseline scenario, inflation
projections are around the target in the relev ant horizon. The Committee also
considered that fiscal risks generate an upward bias in these projections, potentially
justifying an increase in policy rates earlier than that assumed in its baseline scenario.
15. The Copom members discussed the impact of this asymmetry in the balance of risks
in the appropriate degree of monetary stimulus. In particular, some members
questioned whether it would still be appropriate to maintain an extraordinarily high
degree of stimulus, given the normalization of the economic activity o bs erved in recent
months. Since the May 2020 Copom meeting, when the desired degree of monetary
stimulus was characterized as "extraordinary", there has been a reversal on the
disinflationary shock that occurred in the first months of the year, a reversal of the
236th Meeting
COPOM
January 19-20
bcb.gov.br
downward trend on inflation expectations and a decline on economic slack, bringing
inflation projections on the baseline scenario closer to its target in the relevant horizon.
Therefore, these members believe that the Copom should consider starting a process
of partial normalization, reducing the "extraordinary" degree of monetary stimuli.
16. Lastly, the Committee concluded that despite some normalization in econom ic
activity , uncertainty regarding the future dynamics of main economic variables remains
above the usual. The next data release will be very informative about the evolution of
the pandemic, economic activity, and fiscal policy. Thus, the benefits of waiting for
these releases to decide on the next steps of monetary policy outweigh the costs. For
this reason, at this time the Copom deemed it appropriate to maintain the
extraordinarily high degree of monetary stimulus.
D) Monetary policy decision
17. Taking into account the baseline scenario, the balance of risks, and the broad array
of available information, the Copom unanimously decided to maintain the Selic rate at
2.00% p.a. The Committee judges that this decision reflects its baseline scenario for
prospective inflat ion, a higher-than-usual variance in the balance of risks, and it is
consistent with convergence of inflation to its target over the relevant horizon for
monetary policy, which includes 2021 and, mainly, 2022.
18. The Committee believes that persevering in the process of reforms and necessary
adjustments in the Brazilian economy is essential for a sustainable economic recovery.
The Copom also stresses that uncertainty regarding the continuation of the reform
agenda and permanent changes to the fiscal consolidation process could result in an
increase in the structural interest rate.
19. According to the forward guidance introduced in its 232
nd meeting the Copom
would not reduce the monetary stimulus as long as specified conditions were met.
Based on new information, the Committee judges that those conditions no longer hold,
as inflation expectations, as well as inflation projections for its baseline scenario, are
sufficiently close to the inflation target over the relevant horizon for monetary policy.
Therefore, the forward guidance no longer holds and, henceforth, monetary policy will
follow the usual analysis of the balance of risks for the prospective inflation.
20. The Copom reiterates that the removal of the forward guidance does not
mechanically imply interest rates increases, since, at this moment, uncertainties
regarding the evolution of growth still prescribe an extraordinarily strong monetary
stimulus.
21. The following members of the Committee voted for this decision: Roberto Oliveira
Campos Neto (Governor), Bruno Se rra Fernandes, Carolina de Assis Barros, Fabio
Kanczuk, Fernanda Feitosa Nechio, João Manoel Pinho de Mello, Maurício Costa de
Moura, Otávio Ribeiro Damaso and Paulo Sérgio Neves de Souza.