While the COPOM seemed a bit more optimistic about the external scenario, there was no significant change in the local activity view.
On inflation, the BCB acknowledged the recent spike in inflation indicators. However, the Bank suggested it expects those inflationary pressures to be only temporary. The COPOM reaffirmed that the multiple core measures “remain below the level compatible with meeting the target in the relevant horizon.”
The BCB kept the door open for further “small” rate cuts, which we see as a standard Central Bank stance to avoid tying its hands for future decisions. The Bank continues to suggest it plans to keep the stimulus for a long time, but notes that a lack of progress with the reform agenda and persistently lax fiscal policy are major risks to this view—they would increase the economy’s structural rate and hence bring the need to adjust the policy rate upwards.
We share the BCB’s view that disinflationary forces from the large output gap will, in the medium term, outpace the short term inflationary shocks. Therefore, we reaffirm our view that the policy rate will remain at 2.0% throughout the end of 2021.