MNI BCB Review - June 2021: Hawkish Shift Provides Future Flexibility

Executive Summary:

• The BCB hiked the Selic rate by 75bps to 4.25% in a unanimous decision.
• In a clear hawkish shift, the COPOM removed the reference to 'partial' normalisation.
• Additionally, the Copom indicated that they predict another adjustment of the same magnitude at the August meeting.
• However, in an extra hawkish twist, the committee added that a further deterioration in inflation expectations may prompt a "quicker reduction" of stimulus.

The full review with analyst views can be found here:

MNI BCB Review - June.pdf

MNI POV: Hawkish Shift Provides Future Flexibility

At the June 16 meeting, the Copom hiked the Selic Rate by 75 basis points to 4.25%, in a unanimous decision. This was in line with the expectations of all analysts surveyed by Bloomberg.

• The post-meeting statement provided a clear hawkish shift. Persistent inflationary pressures prompted the BCB to alter their language relating to the path for normalisation. By removing the word 'partial', markets have been given a clear signal that the committee "foresees the continuation of the monetary normalization process".
• Additionally, the Copom have indicated that they predict another adjustment of the same magnitude (75 bps hike) at the August meeting. In an extra hawkish twist, however, the committee added and important caveat that a further deterioration in the expectations for inflation may prompt a "quicker reduction" of monetary policy stimulus.
• Subject to the evolution of inflation expectations, this provides the potential for the Copom with future flexibility regarding monetary policy decisions. The likelihood of the Copom surprising the market with a larger than expected hike, as they did at the March meeting, have certainly increased.