MNI BCB Preview – Sep 25: Copom To Maintain Hawkish Messaging

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Executive Summary

• Analysts are unanimous that the Copom will leave the Selic rate unchanged at 15.00% for a second consecutive meeting on Wednesday, as it maintains its high for longer stance.
• Although inflation has continued to edge lower, it remains well above target, while unanchored inflation expectations are still a concern for the Board, despite a further gradual improvement.
• As such, there are unlikely to be any surprises in the post-meeting statement, given the firm guidance of maintaining the Selic rate at current levels for “a very prolonged period” to ensure the convergence of inflation to target.
• Many analysts only see the easing cycle beginning in the first quarter of next year, although some still see risks of an earlier move.

Despite the further dip in inflation expectations in recent weeks, BCB Governor Gabriel Galipolo has reiterated the central bank’s hawkish messaging, noting that expectations remain unanchored, requiring vigilance and demanding that interest rates are kept at a restrictive level for a prolonged period. He has also noted that inflation is converging to target slowly, warranting the restrictive monetary policy stance. Despite this stance, the labour market remains resilient, although he believes that the local economic data are showing some mixed signals and he can see the monetary policy transmission mechanisms working a bit more clearly in the credit market.

Similarly, Deputy Governor Guillen has continued to emphasise the high for longer messaging as well, also noting the continued dynamism in the labour market, and above target inflation, despite some moderation in economic growth. That resilience in the labour market has provided considerable support to consumption and income, he said, while the inflation scenario has continued to present bearish surprises as persistent services inflation remains above the level compatible with meeting the target. For now, Guillen said that the key thing is to reinforce the central bank’s communication amid an adverse and uncertainty global environment.