Thought September 16, 2020 / 10:43 pm UTC

Brazilian Central Bank Downplays Inflation Spike

By Priscila Robledo

As expected, the Central Bank of Brazil’s (BCB) monetary policy committee (COPOM) maintained the policy rate unchanged at 2.0%. The communique is somewhat less hawkish than the market expected. We still expect the BCB to keep the policy rate at 2.0% throughout 2021. 

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.

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Analyst Certification
I, Priscila Robledo, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.