Copom minutes: change does not indicate end of the cutting cycle – 03/26/2024 – Market

Understanding the change in communication about future steps as an indication of a change in the interest policy cycle is a mistake, says the Copom (Monetary Policy Committee) of the Central Bank in minutes this Tuesday (26).

Although the base scenario was not significantly changed between the January and March meetings, the committee considered it appropriate to gain more flexibility in the face of uncertainties in the international scenario and in the domestic environment.

For some Copom members, if this uncertainty remains high in the future, a reduction in the pace of interest cuts may be appropriate, even if the rate at the end of the cycle does not change.

“The base scenario did not change substantially, but, with the uncertainties of the scenario, it was deemed appropriate to have greater monetary policy flexibility. Even though the communication already contained an embedded conditionality, it was assessed that it did not provide the required flexibility”, he said.

“Such change merely reflects a cost-benefit analysis of the use of this additional monetary policy instrument. Finally, it was reinforced that it would be a mistake to interpret the change in future signaling as an indication of a change in the monetary policy cycle compatible with the base scenario”, he added.

According to the BC board, a late withdrawal of the “forward guidance” (future prescription) could be seen as an unfulfilled promise and should be avoided, as it could have an impact on the credibility of communication and cause excessive volatility.

“Some members further argued that, if prospective uncertainty remains high in the future, a slower pace of monetary easing may prove appropriate, for whatever terminal rate is desired to be achieved,” he said.

Last Wednesday (20), the Copom reduced the basic interest rate (Selic) for the sixth time in a row by 0.5 percentage points, from 11.25% to 10.75% per year.

With this new cut, the BC board maintained the intensity applied since the beginning of interest rate flexibility, in August last year.