Copom meeting minutes: Better forecasts, deteriorating balance of risks

The Copom meeting minutes released earlier today show that the 2016 inflation forecast was reduced. That happened in the reference scenario, in which the exchange rate was kept flat at (from 3.25 previously) and the Selic rate at 14.25% (from 13.75%). This implies a stronger negative contribution from the output gap, in line with the surprising drop of Q2 15 real GDP.

However, the reduction should be only momentary, given that the exchange rate is already touching . This is happening in the context of the recent S&P downgrade to BB+ of Brazil's rating, after heightened fiscal execution risks. As the Copom acknowledges in the meeting minutes, the new perspectives regarding the fiscal consolidation path, implied in the 2016 budgetary piece, affected expectations and asset market prices. It is believed such perspectives will not revert any time soon, implying further deterioration of expectations. In addition, the higher the inflation forecast for this year goes (as also presented in the meeting minutes), the higher the inertia effect's contribution to next year's inflation. In sum, the Copom acknowledges that the balance of risks has deteriorated.

"We do not expect a change in the Selic rate. The higher volatility in international financial markets affecting EMs, lower global growth, higher uncertainty from non-economic events in Brazil (such as the Car Wash investigations), a longer and deeper recession and the stronger-than-expected labor market deterioration are all factors mentioned in the minutes that support our view that the Copom has ended the tightening cycle yet retains a hawkish speech aimed at controlling the deterioration of inflation expectations due to the weaker FX and looser fiscal policy", says Barclays.