The Central Bank’s Copom (Monetary Policy Committee) assessed that the supply shock resulting from the war in Ukraine could translate into prolonged pressure on inflation, according to the minutes of the last meeting released this Tuesday (22).
The conflict between Russia and Ukraine and its consequences guided the collegiate’s discussion on Brazilian monetary policy. Last week, the Copom raised the basic interest rate (Selic) by 1 percentage point, from 10.75% to 11.75% per year, the highest level in five years.
At the meeting, the Copom considered that the conflict in Eastern Europe adds even more uncertainty and volatility to the current scenario, and imposes an important supply shock in several commodities, in particular energy.
“The reorganization of global production chains, with the creation of redundancies in the production and supply of inputs and a change in the treatment of stocks of goods (in the sense of holding larger stocks), gained new impetus with the conflict in Europe and the sanctions applied to Russia”, detailed the monetary authority.
“In the Committee’s view, these developments could have long-term consequences and translate into longer-lasting inflationary pressures on global goods production.”
Faced with the deterioration of the external environment, the Copom included an alternative scenario in its analysis, assessing the impact of the trajectory of oil prices on its projections. “The Committee considers alternative scenario disclosure to be particularly useful and informative in a highly uncertain environment,” he said.
In his assessment, he observed the prices of oil futures contracts, traded on international exchanges, and the projections of industry agencies, both converging to a price per barrel below US$ 100 by the end of this year.
“The Copom concluded that it would be appropriate to maintain the usual hypothesis in the reference scenario, but to adopt as more likely a scenario with an alternative hypothesis for the trajectory of oil prices until the end of 2022”, he indicated.
In its strategy of slowing down the pace of monetary tightening, the collegiate indicated that the increase of at least 0.75% in the projected interest rate cycle throughout the relevant horizon weighed on its assessment and explained the decision to raise the Selic by 1 percentage point. .
“Given the volatility and uncertainty of the current situation, particularly in the international scenario, the Committee opted for a more timely interest rate path than the one embedded in its scenarios”, he pointed out.
In the minutes, the Copom reaffirmed the forecast of an additional adjustment of the same magnitude at the next meeting, that is, of 1 percentage point, which would take the basic interest rate to 12.75% per year in May. But the committee considers that its next moves could be adjusted if necessary.
“The Committee recognizes the challenging scenario for the convergence of inflation to its targets and reinforces that it will be ready to adjust the size of the monetary tightening cycle, if the scenario evolves unfavorably”, he said.
The Copom meets again on May 3 and 4, when the BC collegiate starts to look fully at the 2023 target in its decisions on interest rates, given the lag in the effects of monetary policy on the economy.
Regarding Brazilian economic activity, the Copom highlighted that consumer inflation remains high, with an increase spread across several components, and more persistent than anticipated.
“The rise in industrial goods prices has not cooled down and is likely to persist in the short term, while services inflation accelerated even more. Recent readings came in above expectations and the surprise occurred both in the more volatile components and in those more associated with underlying inflation” , signed.
In the week of the meeting, the median of inflation projected in the Focus survey by economists for 2022 had risen from 5.65% to 6.45%, further distancing itself from the ceiling of the target set by the CMN (National Monetary Council). The objective to be pursued by the monetary authority this year is 3.5%, with a tolerance of 1.5 percentage points up or down. This was the scenario used in the BC simulation.
The interest rate shock is a response by the BC to successive upward revisions of inflation expectations for the next year.
With a year of consecutive increases, totaling 9.75 percentage points, the monetary tightening cycle is at an advanced stage in Brazil. The increase in interest rates in the country is the largest among major economies around the world. In March 2021, the Selic rate was at 2% per year, the lowest level ever.​
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