The minutes of the last meeting of the Central Bank (BC) Monetary Policy Committee (Copom), released this Tuesday, 10, indicated that the IPCA forecast for 2021 in the base scenario is 6.5%. This scenario assumes that the interest rate varies according to the Focus survey and that the exchange rate starts at R$5.15 and evolves at Purchasing Power Parity (PPC). For 2022, the forecast is 3.5%, and for 2023, it’s 3.2%.
Those estimates were already included in last week’s statement, when Copom raised its base rate (Selic) by 1.00 percentage points, to 5.25% annually. It was the fourth straight hike. On this occasion, BC also indicated its intention to raise Selic again at the meeting on September 21-22.
To calculate the forecast, BC used an exchange rate starting at BRL 5.15, which is the average exchange rate observed for the five business days ending July 30.
In September last year, during the release of its quarterly inflation report (RTI), British Columbia announced that it intended to give preference to the PPP exchange rate in its forecast, and not anymore to a fixed or focus-based exchange rate.
In the minutes of the previous meeting, on June 15-16, inflation expectations in the base scenario (concentrated interest and purchasing power parity exchange rate) were 5.8% for 2021 and 3.5% for 2022.
Copom confirmed through the minutes that the baseline inflation scenario has risk factors “in both directions” – that is, to the downside and to the upside of inflation.
“On the one hand, a potential reversal, albeit partial, of the recent increase in international commodity prices in local currency would produce an inflation trajectory below the baseline scenario,” BC said in the document. “On the other hand, further extensions of fiscal policies to respond to the pandemic that are putting pressure on aggregate demand and further exacerbating the fiscal trajectory may lead to an increase in risk premiums in the country. Despite the recent improvement in public debt sustainability indicators, high fiscal risks remain The list of upward asymmetry in the balance of risks, i.e., with trajectories of inflation higher than those expected in the relevant horizon of monetary policy.” These thoughts expressed in the minutes were already included in last week’s statement.
The minutes emphasized new pressures on the “volatile components” of inflation, such as electricity and food costs. In addition, BC noted that consumer inflation is “still going.”
“The latest released indicators show a more unfavorable combination,” BC noted in the document. “We highlight the surprise with the primary component of service inflation and continued pressure on industrial goods, causing an increase in cores.”
When dealing with new pressures on volatile ingredients, the Basel Agreement cited “the potential increase in additional tariffs and new increases in food prices, both of which are the result of bad weather.” “All these factors lead to a significant revision of the short-term outlook,” the foundation added.
The central bank also reiterated in the minutes the idea expressed in a statement last week that “various measures of core inflation are above the range compatible with achieving the inflation target.”
The central bank expects a 10.0% increase in managed rates in 2021, given its base scenario, with floating interest rates and exchange rates at purchasing power parity. In the cases of 2022 and 2023, the expected ratio is 4.6%.
Cobum’s latest meeting minutes confirm that the calculation takes into account a neutral assumption of electricity tariffs, which remains at the “red level 1” in December of each calendar year. Those estimates were already included in last week’s statement. In the minutes of Cobum’s previous meeting, held in June, forecasts for regulated prices indicated an increase of 9.7% in 2021 and 5.1% in 2022.
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