Copom has abandoned its inflation target at any cost in 2022, says BC

MPC Resolution (COBOM) To raise Cilic’s percentage to 9.25% for the seventh time in a row, referring to a new height Of the same size in February, it was in line with the expectations of the majority in the market and should not have an appropriate impact on the exchange rate and the stock market.

However, interest rates may rise, especially those with shorter maturities Part of the expected investors That the Central Bank (BC) indicated a slowdown in the rate of increase in Selic due to weak activity data, the former head of the Department of Open Market Operations (Demb) in British Columbia and the current chief strategist for Renaissance, Sergio Goldenstein.

Although BC reinforces its concern by fixing inflation expectations – which are Above the goal post For 2022 and 2023, 3.50% and 3.25% respectively – Goldenstein estimates that the monetary authority has thrown in the towel to pursue the target for 2022, given the significant cost that could come from already weak economic activity.

See below key excerpts from the interview with Trade Map.

What is the BC statement’s indication of the next steps for monetary policy?

BC’s statement came in line with what I expected. BC acted correctly in noting that the pace of interest rate hikes was maintained in February. If it does not, it will contribute to a stronger deflation of inflation. Despite all the interest in the activity, it can be noted that BC’s focus is on stabilizing inflation expectations.

What is the impact of Coboom’s decision on the markets?

How do Some analysts They hoped that due to the frustrating activity data, BC would soften the tone, and the interest curve could remain flat [achatada]Interest rates with shorter maturities are likely to rise slightly, while interest rates with longer maturities may continue to fall.

As for the exchange rate, I think the effect is neutral. Difference of interests in Brazil [para os mercados desenvolvidos] Already related. If the base rate in Brazil will now be 11%, 12% or 13%, that is less important. Likewise for bag, I don’t see major changes to the statement that would have major impacts. The interest curve already reflects an increase in the interest rate to 12.25% at the end of the monetary tightening cycle, an already high level.

What is your expectation of monetary policy?

It held the monetary policy scenario, another 150 basis points high in February and another 100 basis points in March, as the fixed rate ended the current monetary tightening cycle at 11.75%.

The risk of this scenario is that the supply shock will continue to occur further [redução da oferta de suprimentos verificada na pandemia por conta do fechamento de fábricas] Inflation expectations continue to deteriorate. But our scenario suggests that supply shocks are likely to dissipate early next year, causing current inflation to fall, helping to reduce inflation expectations.

Financial uncertainty contributed to the deterioration of inflation expectations. With advance approval PEC from Precatorio, this risk decreased?

The Basel Accord recognizes that attention to the fiscal framework has led to an increase in risk premiums and this affects monetary policy through the channel of inflation expectations. But this did not change the balance of risks in British Columbia.

BC continues to see upside risks [de aumento] For inflation on the financial side, less pressure from rising prices on the commodity side. Weak economic activity was not included in the risk balance, which could be another sign of “doves(Less inclined to monetary tightening).

Although inflation expectations were above the target center, economic activity has slowed, with Keda do PIB 0.1% in the third quarter. How does BC assess this balance of risk?

BC did not give activity-related weight. He acknowledged that the GDP came in below expectations, but kept his harsh tone in the extension which reinforces that it is appropriate for the monetary tightening cycle to progress significantly into deflationary territory. However, it gave a plus sign”dovesWhen emphasizing that he will persevere in his strategy until his ‘goals’ are solidified.

In the previous statement, he referred to adjusting monetary policy to ensure “compliance with the inflation target.” This indicates that BC will not pursue the 2022 goal with fire and fire. British Columbia has abandoned its previous focus on pursuing the 2022 target with iron and fire given the cost and shifting concern to stabilizing inflation expectations for 2023.

BC baseline scenario inflation forecast was 3.2% for 2023, which is just a small deviation from the target center [de 3,25% para aquele ano], but it does come.

In the statement, BC highlighted the deterioration of the external scenario of emerging countries as central banks prepare to raise interest rates. What is the impact of this on Brazil?

Central banks in advanced economies are raising the tone extremist [mais inclinado ao aperto monetário] This is another worrying factor. if it was feed it [Federal Reserve, banco central dos EUA] More aggressive, it could depreciate emerging currencies.

On the other hand, a new wave of COVID-19 It can affect activity. The market has already stated that the Fed will raise the benchmark interest rate in the middle of next year. If something more aggressive than priced in the market turns up, it will cause the dollar to rise globally. It may be that, given the already significant level of depreciation of the real, the Brazilian currency will perform less poorly than other emerging currencies, but it will not get away with it.

How will the upcoming elections affect investments?

There is already a lot of risk premium built into the assets with electoral uncertainty. But if you have a third candidate who stands a chance of winning, the risk premium will melt. On the other hand, if we have a polarized political environment, with candidates with populist proposals and the risk of rupture, the risk premiums may rise. Part of this negative scenario is already in asset prices, but that doesn’t mean it can’t get any worse.