MNI BCB Review - August 2021: Continued Acceleration of Hawkish Signals

Executive Summary:

• At the August 04 meeting, the Copom hiked the Selic Rate by 100 basis points to 5.25% in a unanimous decision.
• This was in line with the expectations of the majority of analysts surveyed by Bloomberg and market pricing.
• The post-meeting statement provided another clear hawkish shift. No longer describing their actions as a process of normalisation, the committee described their baseline scenario as a "tightening cycle of the policy rate to a level above neutral".
• The decision and statement should pressure local swap rates higher and will likely act as an immediate tailwind for BRL.

For the full review please click here: MNI BCB Review - August 2021.pdf

At the August 04 meeting, the Copom hiked the Selic Rate by 100 basis points to 5.25% in a unanimous decision. This was in line with the expectations of the majority of analysts surveyed by Bloomberg and market pricing.

• The post-meeting statement provided another clear hawkish shift. No longer describing their actions as a process of normalisation, the committee described their baseline scenario as a "tightening cycle of the policy rate to a level above neutral". The decision and statement should pressure local swap rates higher and will likely act as an immediate tailwind for BRL.
• While this had been widely observed by analysts as being a possibility, it is a notable shift and will likely cement 2021 year-end forecasts for the Selic rate towards the upper end of estimations.
• The stronger policy action at this meeting was justified by the prospect of a further deterioration of inflation expectations, arising from the recent deterioration of inertial components of inflation.
• The Copom reiterated the downside risks to their baseline scenario may stem from further extensions of fiscal policy responses to the pandemic, potentially deteriorating the fiscal path. Particular attention will need to be paid to the upcoming adjustments to Bolsa Familia and the relevant pressures that may be placed on the spending cap.
• The committee have outlined that they foresee another adjustment of the same magnitude at the September meeting. Of course, the Copom included the usual caveat that future policy steps can be adjusted and will continue to depend upon the evolution of economic activity, on the balance of risk and on inflation expectations.