Brazil's Central Bank Monetary Policy Committee (Copom) reaffirmed the likelihood it will continue to cut rates and at the same time perhaps put into question its commitment to the 4.5% inflation target for 2013, according to the quarterly inflation report released Thursday morning.
”Considering the value projected for inflation and the associated balance of risks, the Copom attributes a high probability to the realization of a scenario which contemplates the Selic (overnight) rate moving to levels slightly above the historic minimums and stabilizing at these levels, monetary policymakers wrote in Thursday's report, echoing the wording of the March 15 Copom minutes.
Since the Selic's historic minimum is 8.75%, the markets have taken this phrase as a signal the Copom will cut the Selic to 9.0% from the current 9.75%.
Yet based on the forecasts in the report, a Selic at 9.0% would lead to inflation above the target in 2013. Since the inflation target is 4.5%, even a Selic at 9.75% appears incompatible with the 2013 target.
In current round of easing that began August 31, the Copom cut the Selic 50 basis points four times in a row, then at the last meeting March 7 cut 75 bps to bring the Selic to 9.75%.
Private sector consensus is policymakers will cut the Selic another 75 bps to 9.0% at the April 18 meeting, to end this easing cycle.
In the report's reference scenario, which projects inflation based on the Selic and currency exchange rate, 1.75 reais to the U.S. dollar, as of March 9, inflation will be 4.4% in 2012, 5.2% in 2013, and 5.1% the first quarter of 2014, which is as far as the report's projection extend.
The report also includes a market scenario, which plugs the market consensus forecast for the Selic of 9.0% and stable exchange rate at 1.75 into the Copom's models, and comes out with a forecast of 4.5% inflation in 2012, 5.3% in 2013, and 5.2% the first quarter of 2014.
In the Copom's December inflation report, the reference scenario had the Selic at 11.0%, the currency at 1.80, and forecast 4.7% inflation in 2012 and 2013.
The improvement in the 2012 scenario in the latest report comes from inflation rates in recent months markedly below the prevailing expectations while the worsening of the 2013 forecast is because the trajectory of interest rates in this Report is distinct from that considered in the prior one.”