MercoPress. South Atlantic News Agency

Brazil keeps Selic rate at 2%, but uncertainty about economic growth remains

New fiscal stimulus in some developed countries and the rollout of COVID-19 immunization programs should promote a solid midterm economic recovery

The Brazil Central bank rate setting committee, Copom, unanimously decided on Wednesday to maintain the Selic rate at 2.00% for the fourth time running, but anticipating that inflation expectations for the next two years have risen and uncertainty surrounds the Brazilian economy in the short term.

The Copom release stats that the emergence of new virus strains are reverting previous mobility gains and should affect short-term activity. However, new fiscal stimulus in some developed countries and the rollout of COVID-19 immunization programs should promote a solid economic recovery in the medium term.

Economic slack and central bank communication from major economies suggest monetary stimuli will last long, resulting in a favorable environment for emerging economies;

Regarding the Brazilian economy, growth indicators at the end of last year have been better than expected, but they do not capture the effects of the recent increase in the number of COVID-19 cases. Thus uncertainty about economic growth remains, especially for the first quarter of this year, concurrently with the expected unwinding of the emergency transfer programs.

Furthermore the recent increase in commodities prices and its effects on food and fuel prices imply an increase in inflation forecasts for the next months. In spite of the stronger short-term inflationary pressure, the Copom maintains that the current shocks are temporary, although more persistent than expected.

The various measures of underlying inflation are in levels above the range compatible with meeting the inflation target; inflation expectations for 2021, 2022, and 2023 collected by the Focus survey are around 3.4%, 3.5%, and 3.25%, respectively and Copom's inflation projections in its baseline scenario, with interest rate path extracted from the Focus survey and exchange rate starting at R$5.35/US$, and evolving according to the purchase power parity (PPP), stand around 3.6% for 2021 and 3.4% for 2022.

This scenario assumes a path for the Selic rate that ends 2021 at 3.25%, and rises to 4.75% p.a. in 2022.

Finally Copom believes that persevering in the process of reforms and necessary adjustments to the Brazilian economy is essential for a sustainable economic recovery. The Copom also stresses that uncertainty regarding the continuation of the reform agenda and permanent changes to the fiscal consolidation process could result in an increase in the structural interest rate.