Brazil Copom minutes – It takes two to tango

The speed and magnitude of fiscal policy improvement are crucial to monetary policy. This is the BCB's main message in the meeting minutes after keeping the Selic rate steady last week, which should not come as a surprise to market participants. The board reckons that the consolidation on the fiscal side and the convergence of inflation to the target will take longer than previously expected, and in this context, monetary policy should remain vigilant.

Higher regulated price adjustments and inflation expectations are increasing the Copom's inflation forecasts for this year and next. The board notes that according to its models, inflation should be higher than previously expected, remaining above the target. In terms of the balance of risks, it stated that international market volatility eased, and any disruptive scenario remains unlikely to materialize. On the domestic front, the board has incorporated all the impetus of the domestic recession, acknowledging the fall in household consumption, but also observing an import substitution process. Yet it reiterated that the GDP contraction has been longer and deeper than previously expected.

Without a material improvement in the fiscal balance, there will hardly be an improvement in the macroeconomic scenario, according to the Copom. Even if the current realignment of macroeconomic policies could lead to an increase of productivity, it will ultimately depend on the fiscal balance adjustment materializing. That said, the board will remain vigilant to assure the convergence of inflation to the target.

"Our reading of this message is that the Copom reckons that it has its hands tied. If in one hand the wide negative output gap argues for lower real interest rates, on the other the loss of any fiscal anchor gives no room for monetary policy easing. With that in mind, we continue to see the Copom not moving the Selic rate in the next few quarters", says Barclays.