MNI BCB Review - Feb 2022: Pace Moderation Signalled

Executive Summary

• At the February 02 meeting, the Copom unanimously decided to hike the Selic rate by 150bp to 10.75%. The decision was in line with the BCB’s prior guidance and all but one surveyed analyst estimates.
• With the forward guidance the clear focus of the meeting, the Copom statement signalled an intention to decelerate the tightening pace going forward. The statement said, “For its next steps, the Committee foresees as adequate, at this moment, a reduction in the pace of adjustment of the interest rate.”
• Analysts point to the BCB’s new communication leaving several options for the March meeting as we approach the end of the tightening cycle.

Click to view the full review: MNI BCB Review - February 2022.pdf

The explicit mention to a “reduction” could be considered dovish at the margin given some analysts may have been expecting a more flexible signal, providing the committee with as much optionality as possible before the March meeting. On the other hand, however, some analysts have sighted the reference to “next steps” as hinting towards a potentially longer hiking cycle than previously envisioned, adding hawkish risks to terminal rate forecasts.

Regarding the economy, the Copom appeared slightly more upbeat on the evolution of Q4 activity and gave a particular mention to labour market data. On inflation, “projections in its reference scenario, with interest rate path extracted from the Focus survey and exchange rate starting at USD/BRL 5.45* and evolving according to the purchase power parity (PPP), stand around 5.4% for 2022 and 3.2% for 2023.” For reference at the previous meeting, the Copom had forecasted 2022 inflation at 4.7%.

As usual, the Copom stated that “future policy steps could be adjusted to ensure the convergence of inflation towards its targets and will depend on the evolution of economic activity, on the balance of risks, and on inflation expectations and projections for the relevant horizon for monetary policy.”