The Central Bank (BC) has pointed to a “significant probability” that the Brazilian economy has retreated slightly in the first quarter of this year over the previous three months, but kept the speech that it needs time to dig deeper into the picture before interest rate, including in this equation the impact of the reforms on the economy.
In its minutes of the Monetary Policy Committee (Copom) published on Tuesday, the BC emphasized that the success of the reforms, especially of fiscal nature, plays a fundamental role in the activity, in a probable reference to the importance of the Social Security reform in this context.
“The process of the gradual recovery of economic activity has been interrupted in the recent period, but the basic scenario contemplates its recovery,” said the BC.
The BC has evaluated in the document that some effects of shocks experienced by the economy in 2018 still persist and added that “uncertainties about fundamental aspects of the future economic environment — notably about fiscal sustainability — have adverse effects on economic activity.”
“Maintaining uncertainties about fiscal sustainability tends to be contractionary,” he said.
“Reforms that generate sustainability of the future fiscal trajectory have expansionary potential, which can offset the effects of short-term fiscal adjustments on economic activity, as well as mitigate the risks of instability episodes with higher risk premiums, such as occurring in 2018”, he pointed out.
According to economist Silvio Campos Neto, a partner at Tendências Consultoria, the Central Bank reinforced that the economic picture carries some disappointment in the first months of the year.
“While uncertainty prevails, it is unlikely that there will be any change in monetary policy guidelines,” he said, which is still expecting three 0.25-point falls in the Selic since October, but provided that a moderate pension reform until then.
In the view of the chief economist of ARX, Solange Srour, the BC emphasized that the uncertainty about the reforms ends up affecting the activity, mainly in the aspect of the investment.
“They need to understand what the effects of possible reform approval on the activity, risk premium, inflation expectations, before taking any change in monetary policy,” she said, which provides for a Selic maintenance at 6.5 percent by the end of 2019.
“I do not see any hurry to pay interest,” he said. “Now if the reform passes and the current data continues to be a very bad activity, expectations of inflation are going back, then the BC may act later this year,” he said.
When it kept the Selic at a record low of 6.5 percent last week, the BC had already acknowledged more signs of economic weakness but stressed that its balance of risks for inflation remained symmetrical.
The Brazilian economy has shown difficulties in moving forward, amid high idleness of the companies and uncertainties about the country’s fiscal situation, with agents waiting for the pension reform, considered crucial to rebalancing the public accounts.
Economists have successively revised down their expectations for the performance of the Gross Domestic Product (GDP) this year. The most current projection, according to the Focus survey of the BC, is an expansion of only 1.45%.
In the minutes, the CB stated that it would stop using the phrase “caution, serenity, and perseverance” from the next Copom meeting, with the understanding that the message has already been assimilated. Therefore, he said that the investee should not be interpreted as changing its way of conducting monetary policy.
Having already pointed out in the Copom statement that the inflation projections and the levels of various underlying inflation measures were at appropriate levels, and no longer appropriate or comfortable, the BC noted in the minutes that 12-month accumulated inflation should reach a peak “in the short term”, to then back off and close 2019 “around the goal.”
Although it has accelerated, inflation came below expectations in April, reaching 4.94% in the accumulated in 12 months. The official target pursued by the government this year is an IPCA of 4.25 percent, with a margin of 1.5 percentage points more or less.