By Francisco Carlos de Assis (Broadcast)
São Paulo, 05/14/2024 – Although the COPOM (The Central Bank’s Monetary Policy Committee) minutes had a rather harsh tone in their writing, according to economist Andrea Damico of Armor Capital and Buysidebrazil, the highlight of the document was the justification of the directors who voted for the cut of 0, 50 percentage point and established an apparent rift on the voting members.
The reason that led four of the 9 BC directors to vote for the higher Selic (Benchmark Interest Rate) cut and which was justified in the minutes released today was the understanding that the forward guidance should have been complied with to ward off reputational risk to COPOM (The Central Bank’s Monetary Policy Committee)’s formal communication. This understanding, revealed today, was anticipated by Andrea Damico on the day of the meeting .
“The minutes are quite harsh, raises the temperature of the external outlook a lot, recognizes the recurring surprises with economic activity and significantly reinforces the message for fiscal policy. It emphasizes this well, but undoubtedly the highlight of these minutes was the justification for the votes of 0.50 percentage point,” reiterates the economist.
According to Andrea, the four directors who voted for the largest Selic (Benchmark Interest Rate) cut opted for more technical justifications. The first point was in favor of maintaining forward guidance, which ended up being crucial for the half-point vote.
“They recognize that there has been an increase in internal and external uncertainties and also say that they share the objective of pursuing the target and re-anchoring expectations, but they put a reputational cost point there of not pursuing guidance,” evaluates the Armor Capital economist .
“They also put the prospective outlook that we brought. The inflation expectation rose to 3.30% from 3.20% which, in theory, is still around the target. So they thought that the reputational cost of not following the guidance for such a small change in the projection could lead to a reduction in the committee’s formal communication power. Therefore, they found it more appropriate to follow the guidance, but reaffirming that they are pursuing the goal “, points out Damico.
For her, the directors who voted for the 0.50-point cut moved to a more technical justification and demonstrated that they see a sufficiently contractionary monetary policy even with a more intense Selic (Benchmark Interest Rate) reduction. They said they agree with the withdrawal of guidance and that it would allow, in light of a new set of information, to calibrate monetary policy appropriately going forward.
“The impression is that at the next meetings they will vote for a 0.25 pp reduction. Most likely, at the June meeting, we will have a 0.25 pp cut and with consensus. It was a very suitable outlook , a also adequate response and fortunately more on the technical side, signaling that at the next meeting they should calibrate the path of the monetary policy instrument,” he said.
At Armor Capital, at least, there is already consensus on the team that in June, most likely, the Selic (Benchmark Interest Rate) will be cut by 0.25 percentage point to 10.25% per year.
