Minutes cite hiatus, oil, dollar and Selic trajectory to increase Copom projections

The Monetary Policy Committee (Copom) of the Central Bank reported, in the minutes of its meeting last week, that the increase in its official inflation projections at this month’s meeting was mainly caused by a tighter output gap and changing conditions such as oil prices, exchange rate depreciation and reduction in the Selic rate trajectory in the Focus Bulletin. The BC’s official projections rose in every year considered in the minutes released this Tuesday by the monetary authority.

In the relevant horizon, there was an increase from 3.4% to 3.5% for 2024, the main focus of monetary policy, and from 3.0% to 3.1% for 2025, which has a minority weight in decisions. The target center for both years is 3.0%.

“After analyzing the scenario, all members agreed that it was appropriate to reduce the Selic rate by 0.50 percentage points, in order to adjust the degree of prospective monetary tightening”, considered the BC.

Last week the Copom reduced the Selic for the second consecutive time, from 13.25% to 12.75% per year.

In the minutes, the BC also showed that there were differences between Copom members in the evolution of the scenario. The document highlighted that inflation expectations remain above the target and have remained relatively stable recently – for 2025 and 2026, Focus has been showing the median at 3.50% for weeks. According to the minutes, some Copom members “were particularly concerned about the possibility of targets being unanchored for a long period”.

Regarding the disinflationary process, the document highlighted that it remains ongoing, with services inflation slowing down at the margin. At this point, part of the members had a more positive view and the rest were still cautious. “Some members particularly emphasized the recent benign composition of inflation and the decline in services inflation, while others emphasized that the underlying fundamentals for the dynamics of services inflation, in particular the resilience of economic activity and the labor market, are not yet allow us to extrapolate recent benign behavior with conviction.”

As for the output gap, as anticipated by the director of International Affairs, Fernanda Guardado, in a recent event, the Copom considered that there was a squeeze on the margin, due to the “greater resilience of economic activity”. The panel also informed that the implications of alternative ways of measuring the output gap and their respective impacts on projections were evaluated.