Cards on the table
In a longer-than-usual meeting, the Copom ultimately decided on another 0.25 p.p. reduction in the Selic rate target, to 14.25% per year, as expected by the market and by us. That said, although the Copom’s assessment, expressed in the statement released after the meeting, is unequivocally more hawkish than at the previous meeting, the monetary policy stance appears to point in the opposite direction.
In particular, although its inflation projection for the relevant horizon increased and therefore showed “a further deviation from the target,” as shown in Table 1 below, the Central Bank signaled that it is, in fact, extending the convergence period, a topic we have explored in several reports in recent weeks. In the Committee’s words:
“In the current simulations, the monetary policy path required to ensure inflation convergence to the target within the current relevant horizon would imply that projected inflation rates from the relevant horizon applicable at the next meeting onward would be below the target. Under these conditions, the Committee assesses that alternative paths ensuring inflation convergence to the target in the first quarter of 2028, the relevant horizon as of its next decision, are consistent with smoothing fluctuations in macroeconomic aggregates.” (emphasis added)
Although it seems clear to us that convergence is unlikely to materialize in the first quarter of 2028, given the 3.7% inflation projection for 2027, the Central Bank’s strategy has finally become explicit. To moderate the costs of disinflation, the Copom suggests extending the period for inflation to converge to the target, as we had been warning, which, in its view, would justify another interest rate cut despite a further increase in its inflation projection for the relevant horizon.
Now read on...
Register to sample a report