Brazil Copom meeting minutes: Doors are almost closed for further hikes

The Copom meeting minutes released earlier today confirmed post-decision statement last week, of no further hikes. After hiking the Selic rate to 14.25%, the Copom said that keeping it at these levels would be necessary to put inflation at the mid-point of the target next year.

"On that occasion, we noted that it is a necessary, however, may not be a sufficient condition, and if the balance of risks changes meaningfully in the following meetings, the possibility of another hike would be not be discarded, our base case scenario is that the tightening cycle was ended on that meeting", says Barclays.

In the minutes, the Copom contemplates the success of monetary policy in containing second-round effects of the current inflation adjustment and also in reducing inflation expectations. Nonetheless, forecasts do not show inflation converging to the mid-point of the target. At the same time, the risks of the trajectory towards the mid-point of the target are mitigated by the lagged and cumulative effects of monetary policy, in the Copom's view. That said, the board will remain vigilant in case inflation forecasts moves significantly away from the mid-point of the target, a hint that the doors are not fully closed for more hikes.

Any strong shock on asset prices due to deteriorated market perception regarding the macroeconomic equilibrium of the country could resume the tightening cycle, In the minutes, the Copom incorporates the recent changes in the fiscal target in a structural calculation, which means that, cyclically adjusted, still the primary surplus tends to be neutral. However, it also takes into account the deterioration of expectations and asset prices (such as the currency and risk premium) that followed the new target's announcement, highlighting that significant modifications in the trajectory of the primary surplus affects monetary policy and creates a less positive perception of the economic medium- and long-term outlook.

The growth recession is part of the current macroeconomic adjustment and should continue deteriorating this year. In this context, the household consumption drivers are all weaker, as observed in employment and income high-frequency data. The Copom also notes that the credit market deteriorated further since the last meeting. However, apart from taking stock of recent data, there is no further major concern regarding the economic recession, in contrast to market expectations ahead of the July meeting, which sends the message that inflation remains at the forefront of monetary concerns, a necessary move to crystallize the recent gains in credibility.

Finally, there is no indication whatsoever regarding any upcoming monetary policy easing, which makes sense. Given that, the risks for inflation are still on the upside, especially considering the recent asset price movement highlighted by the board, and that the growth deterioration is still not a major concern, but rather part of a broader adjustment, there should be no reason to discuss cutting the Selic rate anytime soon.

"We continue to see the BCB keeping a relatively hawkish position as inflation forecasts remain above the mid-point of the target and, as of now, we continue to expect that any cut in the Selic rate should come only by the end of Q1 16", added Barclays.