The minutes of the May 8 Monetary Policy Committee meeting show that the BCB has accepted that growth will disappoint this year and the output gap will grow larger. However, the BCB did not change its outlook on inflation, in part because BRL weakness will support inflation expectations.
While the BCB acknowledged that the global backdrop has played a part in its downgraded GDP forecast, the Bank saw internal forces as the main reasons for the slowdown. First, events in 2018 impacted activity in Q1 2019. Second, uncertainty over reforms and fiscal policy is impacting the economic outlook. While the BCB does not explicitly mention that the current environment will impact 2020 growth, we believe the message is clear between lines.
The BCB did not link the larger output gap to inflation. We believe this is due to BRL weakness from uncertainty, both internal and external. External issues include global deceleration, trade wars and monetary adjustment in major economies. The main internal issue is pension reform.
We believe that these sources of uncertainty will not be removed for at least a quarter. We are aware that some may see the dovish view on growth as reason to bet on rate cuts but, given the described scenario, we are keeping our view that the BCB will not change the Selic rate until Q4 2020, when we expect a couple of hikes to reduce the size of the current monetary stimulus.