MNI POLICY: BCB Divided Over Risks To Inflation

MNI (BRASILIA) - The Central Bank of Brazil’s board disagreed over its assessment of the balance of risks to inflation at its July 31 meeting, with at least one member insisting that risks were symmetrical while several others stressed those to the upside, MNI understands.

Minutes from the meeting released last week had emphasized the unanimous nature of the decision to hold the Selic rate at 10.5% for a second straight time, saying that all members agreed upside risks to inflation had increased. "Several members" were said to have highlighted the asymmetry of the balance, and the minutes made no explicit reference to any disagreement on the matter.

The divergence of opinions on the board over risks could be decisive in Copom’s September meeting should it persist. The central bank is now data-dependent, but the option of a rate hike has been put on the table.

NEW UPSIDE RISK

In its July decision, Copom added the inflationary side effects of foreign or domestic economic policy such as currency depreciation as a risk that could exert upward pressure on prices, taking its list of such factors to three. At its previous meeting in June, it had identified two factors each to the downside and upside, and the shift prompted market speculation as to whether Copom as a whole now sees the balance as asymmetric. (See MNI INTERVIEW: Copom To Hold Rates Despite Hawkish Tone -Velho)

Deputy Governor for Monetary Policy Gabriel Galipolo fed this vein of speculation on Monday, when he stated at a public event on Monday that while he personally believes the balance of risks is skewed to the upside, an argument for the balance to be symmetrical could be based on the view that some risks are more heavily weighted than others.

No other Copom member has made their view on the matter public. Governor Roberto Campos Neto spoke several times this week but the question did not come up.

On the upside, Copom also highlighted the risks of a prolonged de-anchoring of inflation expectations, and greater-than-expected persistence of services inflation. On the downside, it pointed to a surprisingly steep global economic slowdown and a greater-than-expected impact of past monetary tightening on world inflation.