BCB COPOM Minutes - Meeting 232
Central bank: bcb | Type: minutes | Date: 2020-08-04

Minutes of the 232nd Meeting of the
Monetary Policy Committee (Copom*)
Banco Central do Brasil**
August 4-5, 2020
* The Monetary Policy Committee of the Banco Central do Brasil is herein referred to as the “Copom” and the
“Committee”.
** These minutes represent Copom's best effort to provide an English version of the minutes of its policy
meeting. In case of any inconsistency, the original version in Portuguese prevail
Banco Central do Brasil** 232nd Copom Meeting
Date: August 4-5, 2020
Place: BCB Headquarters’ meeting room on the 8th floor – Brasilia – DF – Brazil
Starting and ending times: August 4: 10:10 AM – 12:41 PM; 2:56 PM – 7:32 PM
August 5: 2:02 PM – 6:19 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 (present on August 4)
Alan da Silva Andrade Mendes – Department of Foreign Reserves
André Minella - Research Department (present on August 4-5 sessions)
André de Oliveira Amante – Department of Open Market Operations
Fabia Aparecida de Carvalho – Department of International Affairs
Flávio Túlio Vilela – Department of Banking Operations and Payments System
Ricardo Sabbadini – Department of Economics
Other participants (present on August 4)
Adalberto Felinto da Cruz Junior – Executive Secretary
Leonardo Martins Nogueira – Head of the Governor’s Office
Rogério Antônio Lucca – Head of the Deputy Governor for Monetary Policy’s Office
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.
Banco Central do Brasil** 232nd Copom Meeting
A) Update of the Economic Outlook and
Copom’s Baseline Scenario1
1. Regarding the global outlook, the Covid-19 pandemic
keeps causing the largest economic downturn since the
Great Depression. Against this backdrop, despite some
promising signs of recovery in major economies, and
some moderation in financial ass ets volatility, the
environment for emerging economies remains
challenging.
2. Turning to the Brazilian economic activity, recent
indicators suggest a partial recovery. Sectors more
directly affected by social distancing measures remain
depressed despite the offsetting effects of the
government transfer programs. Prospectively,
uncertainty about economic growth remains larger
than usual, especially for the period starting at the end
of this year, concurrently with the expected winding up
of the emergency transfer programs.
3. Various measures of underlying inflation remain
below the level compatible with meeting the inflation
target at the relevant horizon for monetary policy.
4. Inflation expectations for 2020, 2021, and 2022
collected by the Focus survey are around 1.6%, 3.0%,
and 3.5%, respectively.
5. Short-term inflation seems to be cooling after July’s
sharp increase. Relative to the previous Copom
Meeting, shor t-term projections remain relatively
stable. Revisions to some components of service price
inflation have offset the impact of the depreciation of
the Brazilian real and the rise in commodity prices.
6. The Copom's inflation projections in the hybrid
scenario with interest rate path extracted from the
Focus survey and constant exchange rate at
R$5.20/US$2 stand around 1.9% for 2020, 3.0% for 2021
and 3.4% for 2022. This scenario assumes a path for the
Selic rate that ends 2020 at 2.0% p.a., rises to 3.0% p.a.
in 2021 and 5.0% p.a. in 2022. In this scenario, inflation
projections for administered prices are 1.6% for 2020,
3.4% for 2021, and 3.9% for 2022.
7. The scenario with constant interest rate at 2.25% p.a.
and constant exchange rate at R$5.20/US$ yields
inflation projections around 1.9% for 2020, 3.0% for
2021 and 3.7% for 2022. In this scenario, inflation
projections for administered prices are 1.6% for 2020,
3.4% for 2021, and 3.9% for 2022.
1Unless explicitly stated otherwise, this update takes into
account changes occurred since the June Copom meeting
(231st meeting).
B) Risks Around the Baseline Inflation
Scenario
8. The Committee emphasizes that risks to its baseline
scenario remain in both directions.
9. On the one hand, economic slack may continue to
produce a lower -than-expected prospective inflation
trajectory. This risk increases if a slower reversion of
the pandemic effec ts lengthens the environment of
high uncertainty and precautionary savings.
10. On the other hand, fiscal policy responses to the
pandemic that permanently aggravate the fiscal path
or frustrations regarding the continuation of the
reform agenda may increase t he risk premium.
Additionally, the credit and transfer programs
implemented in response to the pandemic may cause a
smaller-than-estimated decline in aggregate demand,
introducing an asymmetry to the balance of risks. This
set of factors could potentially result in a higher -than-
expected path for inflation over the relevant horizon
for monetary policy.
C) Discussion about the conduct of
monetary policy
11. Regarding the global economy, the data already
available for the 2020Q2 GDP did not surprise, but it
showed that the depth of the current economic
downturn is only comparable to that of the Great
Depression. There are some promising signs of
recovery which, however, has shown to be incomplete.
The strong recovery in consumption was not followed
by the ser vices sector. The Committee pondered that
the main restriction to a full recovery in the major
economies is the evolution of the pandemic itself, and
the possibility of a second wave of the virus is a major
risk.
12. The Copom members discussed the evolution of
domestic economic activity in light of the available
information and indicators. They evaluated that recent
data suggest a partial recovery of the economic
activity. Government transfer programs have allowed
for a relatively strong resumption of durable goods
consumption and even of investment. However, several
service sector activities, especially those most directly
affected by social distancing measures, remain quite
depressed. Looking forward, the poor predictability
associated with the evolution of the pandemic and the
necessary decline in emergency aid by the end of 2020
2 Value obtained according to the usual procedure of rounding
the average R$/US$ exchange rate observed in the five business
days ended in the last day of the week prior to the Copom
meeting.
Banco Central do Brasil** 232nd Copom Meeting
increase uncertainty about the speed of the economic
recovery. The Committee considered that this
unpredictability and the risks associated with the
evolution of the pandemic may im ply a domestic
scenario characterized by an even more gradual
recovery of the economy.
13. The Copom members debated on the level of
economic slack. As with the activity, the Committee
believes that the pandemic should continue to have
heterogeneous effects on the economic sectors. Given
the nature of the shock, the service sector should
continue to have a larger economic slack than other
sectors. The Committee concluded that the nature of
the crisis probably implies that the disinflationary
pressures from re duced demand may last longer than
in previous recessions.
14. The Committee then assessed the appropriate
degree of stimulus for the current environment. First,
it analyzed whether the existence of an asymmetry in
its balance of risks, mainly related to fisca l issues and
the continuation of reforms in the Brazilian economy,
would be a sufficient reason to maintain the stimulus at
its current level. Given its perception of economic slack
and prospective inflation, the Committee considered
that, although asymmetric, its projections for inflation
are below the target for the relevant horizon for
monetary policy. Therefore, in line with its inflation
targeting mandate, the Committee concluded that it
would be appropriate to increase residually the degree
of monetary stimulus.
15. The Committee then resumed discussion of a
potential effective lower limit for the Brazilian policy
interest rate and its connection with prudential and
financial stability issues. For the majority of the
members of the Copom, this limit would be significantly
higher among emerging economies than among
developed countries due to the existence of a risk
premium. This premium is dynamic and tends to be
larger in Brazil, given the country's relative fisca l
fragility and the uncertainties regarding its prospective
fiscal path. In this context, we would already be close to
the level from which further interest rate reductions
could be accompanied by asset price instability.
16. The Copom also discussed the rel ative importance
of the main components of credit and operating costs
of the financial system. Considering the long history of
the Brazilian economy operating with the basic interest
rate at a very high level, the unprecedented low
interest rates may compr omise the performance of
some markets and economic sectors, with potential
impact on financial intermediation. Based on results
from stress test scenarios, the Committee considers
that the financial system is resilient to the credit risk
arising from the c urrent pandemic. However, when
analyzing the financial system in a broad way –
considering its various industries, markets, products
and financial services – the Committee reflected that
an unprecedentedly low interest rate environment may
generate increas ed asset price volatility. Moreover,
without the necessary time to transition to a new
environment, it may affect the proper functioning and
dynamics of the financial system and the capital
markets. Hence, the Committee concluded that
possible new interest rates reductions would demand
caution and additional gradualism. To this end, if
necessary, further interest rate cuts would require
greater clarity about prospective inflation and activity
and could be spaced over time.
17. In order to provide the monetary stimulus deemed
adequate to meet the inflation target, but maintaining
the necessary caution for prudential reasons, the
Copom considered the use of a forward guidance as an
additional monetary policy tool. The Copom discussed
the limitations on the use of this instrument in
emerging countries. Relative to developed countries,
emerging countries are more susceptible to contagion
from external crises and have greater vulnerabilities in
their economic fundamentals. Ther efore, due this
greater unpredictability and volatility, the use of such
an instrument becomes more challenging. The
Committee concluded that despite those limitations,
the forward guidance would be the policy strategy with
the best cost -benefit ratio. The forward guidance
transmits the Committee's vision on its future actions
and tends to adjust the expectations reflected on the
intermediary part of the yield curve.
18. To adapt the forward guidance to the dynamic
limits imposed by prudential issues, the Comm ittee
considered that it should have an asymmetric policy
intention, in which, if the necessary conditions were
met, the Copom would not raise the interest rate but
could reduce it. To maximize its effectiveness, the
Committee decided that this forward gui dance should
be conditional on inflation expectations, as well as on
the inflation projections of its baseline scenario, for the
relevant monetary policy horizon, which currently
includes 2021 and, to a lesser extent, 2022. This
information on inflation wo uld be considered
altogether and, when they were sufficiently close to
the inflation target for the corresponding horizon, they
would indicate the end of the intention.
19. Given the difficulties inherent in using forward
guidance in emerging economies, in ad dition to
expectations and projections of inflation in the
relevant horizon, the Committee also deemed
necessary to condition its interest rate policy intention
on two other factors. First, it is conditio nal on the
maintenance of the fiscal regime, since i ts rupture
would imply significant changes to the structural
interest rate of the economy. Second, it is conditional
on the anchoring of long -term inflation expectations,
given that an unanchoring would indicate that the costs
derived from the monetary sti mulus would be
outweighing its benefits.
Banco Central do Brasil** 232nd Copom Meeting
D) Monetary Policy Decision
20. Taking into account the baseline scenario, the
balance of risks, and the broad array of available
information, the Copom unanimously decided to lower
the Selic rate by 0.25 percentage point to 2.00% 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 it is
consistent with the convergence of inflation to its
target over the relevant horizon for monetary policy,
which includes 2021 and, to a lesser extent, 2022.
21. The Comm ittee 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
doubts 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.
22. The Copom believes that the current economic
conditions continue to recommend an unusually strong
monetary stimulus but it recognizes that, due to
prudential and financial stability reasons, the remaining
space for monetary policy stimulus, if it exists, should
be small. Consequently, possible future adjustments to
the current degree of monetary stimulus would occur
with additional gradualism and would depend on the
perception of the fiscal trajectory, as well as on new
information that changes the Committee's current
assessment about prospective inflation.
23. Despite the asymmetry on its balance of risks, the
Copom does not foresee reductions in the moneta ry
stimulus unless inflation expectations, as well as its
baseline scenario inflation projections, are sufficiently
close to the inflation target at the relevant horizon for
monetary policy, which currently includes 2021 and, to
a lesser extent, 2022. This intention is conditional on
the maintenance of the current fiscal regime and on the
anchoring of long-term inflation expectations.
24. The following members of the Committee voted for
this decision: Roberto Oliveira Campos Neto
(Governor), Bruno Serra Fernand es, 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.