Brazil Copom Minutes: Dovish Smoothing Through Intermittent Cuts (Ramos)

Research evidence excerpt

Brazil Copom Minutes: Dovish Smoothing Through Intermittent Cuts (Ramos)

Goldman Sachs

wholesale/producer inflation prints showed clear signs of the effects of geopolitical

conflicts in the Middle East, coming in significantly higher than initially expected. Overall,

the Copom remains of the view that beyond the impact of the conflicts abroad inflation

is still pressured by demand and that that requires “a contractionary monetary stance”,

but it is also of the view that monetary policy has played a decisive role in the observed

disinflation.

The balance of risks for inflation was tweaked by adding a new upside risk (stimulus to

aggregate demand) and risks of second round effects from the impact of weather

shocks on labor productivity and energy costs, but with both upside and downside risks

still characterized as higher than usual. In a major innovation the Copom explicitly

characterizes the balance of risk as skewed to the upside.

1. As upside risks to the inflation outlook and inflation expectations, the Copom

mentions: (i) a longer period of unanchored inflation expectations with longer

horizons incorporating potential second-round effects stemming from supply

constraints in oil and its derivatives and (new) “climate effects upon agricultural

productivity and energy costs”; (ii) stronger-than-expected resilience of services

inflation due to a more positive output gap; (iii) a combination of domestic and

external economic policies that generate a higher-than-expected impact on inflation

through, for example, a persistently more depreciated currency; and (iv) stimuli to

aggregate demand, consumption in particular, leading to above-potential growth,

weakening some of the usual monetary policy transmission channels.

2.