The sea steers BCB
As widely expected, Copom decided to reduce the target for the policy interest rate again by 0.25 p.p., from 14.75% to 14.50% per year, even in the face of higher inflation projections for the relevant horizon.
BCB made it clear that it attributes the deterioration to the effects of the conflict in the Middle East on “the global supply chain and commodity prices that directly and indirectly affect inflation in Brazil”, particularly prices of oil derivatives.
The impact, however, does not end at this dimension. Although the BC does not necessarily point to a change in the symmetry of the balance of risks, the committee notes that the already existing de-anchoring of expectations is negatively affected by such developments, in particular “with longer horizons incorporating potential second-round impacts of supply restrictions of oil and its derivatives”.
Added to this are two changes in the assessment of the current domestic scenario. First, and more importantly, the committee notes that, contrary to what was observed in its previous meetings, both “headline inflation and its underlying measures accelerated, further distancing themselves from the inflation target”. Although current inflation does not necessarily affect projections for the relevant horizon, this is a development that should cause some discomfort to the Central Bank.
Second, economic activity displays a recovery at the beginning of the year. Copom still expects a slowdown over the remainder of 2026, but it is worth noting the different evolution of the scenario relative to what was expected.
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