The BCB’s inflation assessment was more hawkish. Firstly, the COPOM believes the recent increase in commodity prices will pressure inflation in the short term. The board still believes the ongoing spike in inflation is temporary, but it recognizes that the spike will be more persistent than previously thought. Secondly, the COPOM now believes the diverse measures of core inflation are above the interval that is consistent with the inflation target—in December the Bank still believed core inflation was in line with reaching the inflation target. Finally, the COPOM now projects that the policy rate trajectory expected by the market consensus (i.e. 3.25% for 2021 and 4.75% for 2022) would lead inflation to 3.6% in 2021 and 3.4% in 2022, still below the 3.75% and 3.5% targets for 2021 and 2022, but much closer than the Bank’s estimates of a month and a half ago.
As usual, the Bank highlighted that lack of progress with reforms and permanent deviations of the fiscal trajectory would increase the neutral policy rate.
As we expected, the Bank removed the forward guidance, which stated the BCB had no intention to increase the policy rate in the policy horizon. The Bank made clear again that the removal of the forward guidance does not mechanically imply rate hikes. While our baseline scenario still does not consider rate hikes until Q2, we would not rule out a rate hike as soon as in March, especially if the pace of increase of the core inflation measures does not ease or if the risks of an extension of the emergency aid become more acute.