MNI BCB Review – May 2023: Less Hawkish Tweaks

Executive Summary

• At the May 03 meeting, the BCB unanimously decided to keep the Selic rate unchanged at 13.75%, in line with expectations.
• In a moderate adjustment to the prior statement, the BCB stated that although they will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected, they now see this as a “less likely scenario”.
• The statement highlights that the current scenario “demands patience and serenity in the conduct of monetary policy”.
• Despite acknowledging the new fiscal framework proposal does partly dampen the fiscal uncertainty, the Copom reiterated that there is no mechanical relationship between the convergence of inflation and the fiscal framework. The statement emphasised that the committee judges that the de-anchoring of long-term inflation expectations raises the cost of the disinflation that is needed to reach the BCB’s targets.
• All analysts have acknowledged the moderately dovish tweaks to the statement with most highlighting that the language is in keeping with an easing cycle that begins later this year.
• The short-term focus will remain on inflation expectations as the committee will require a downward trend to emerge before the commencement of monetary easing.
• Furthermore, ongoing developments regarding the fiscal framework and its passage through congress, combined with the persistent verbal attacks from the administration over high rates remain lingering risks to the central bank’s reaction function.

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MNI BCB Review - May 2023.pdf