The Central Bank (BC) reaffirmed this Thursday, through the Quarterly Inflation Report (RTI), that it does not intend to raise the Selic (the basic interest rate of the economy), unless inflation expectations are close to the targets .
Last week, the board maintained the Selic rate at 2.00% per year. On that occasion, the BC released its projection of inflation in the hybrid scenario, with interest from the Focus report and fixed exchange rate of R $ 5.30: 2.1% for 2020, 2.9% for 2021 and 3.3% for 2022. These percentages are below the inflation targets pursued by the Central Bank: 4.00% for 2020, 3.75% for 2021 and 3.50% for 2022.
In practice, the BC has given the indication that it can raise the Selic rate only when inflation expectations are close to the targets.
In today’s RTI, the BC also stated that there is an “asymmetry in its risk balance”. On the one hand, the BC recalls that the level of idleness in the economy may produce inflation below expectations. On the other hand, he mentions that fiscal policies to respond to the pandemic and frustrations with reforms can raise inflation. In this sense, programs can add an asymmetry to the risk balance.
Still, the Central Bank does not see interest rate hikes at this time. In its technical language, the collegiate stated: “despite an asymmetry in its risk balance, the Copom does not intend to reduce the degree of monetary stimulus, unless inflation expectations, as well as the inflation projections of its basic scenario, sufficiently close to the inflation target for the relevant monetary policy horizon, which currently includes the calendar year 2021 and, to a lesser extent, that of 2022. This intention is conditional on maintaining the current fiscal regime and anchoring expectations of long-term inflation. “
These ideas were already present in the statement and in the minutes of the week’s decision. In today’s document, the BC also addressed the monetary policy guidance foward.
“In order to provide the monetary stimulus considered adequate to meet the inflation target, while maintaining the necessary caution for prudential reasons, Copom considers it appropriate to use a future prescription (that is, a forward guidance) as an additional monetary policy instrument ”. This future prescription includes, precisely, the assessment in relation to the Selic trajectory, considering the inflation projections, the targets and the tax regime.
The Copom reaffirmed that, in its basic scenario for inflation, risk factors remain in both directions. On one side of the balance sheet, there is still a risk that the economy’s high idleness will produce below-expected inflation, “notably when that idleness is concentrated in the service sector”. “This risk is intensified if a slower reversal of the effects of the pandemic prolongs the environment of high uncertainty and increased precautionary savings,” said Copom at RTI.
However, the Central Bank considers that measures to respond to the covid-19 pandemic that worsen the fiscal trajectory in a prolonged way – or even frustration with the continuity of reforms – may increase risk premiums.
“In addition, the various credit stimulus and income rebuilding programs, implemented in the fight against the pandemic, may cause the reduction in aggregate demand to be less than estimated, adding an asymmetry to the risk balance,” said the BC. “This set of factors potentially implies a trajectory for inflation above the projected horizon relevant to monetary policy.” These assessments were already included in the statement and in the minutes of last week’s Copom meeting.