At its 238th meeting, the Monetary Policy Committee (Copom) unanimously decided to raise the Selic rate to 3.50% a.a.

The update of the basic scenario of Copom can be described with the following observations: 

• In the external scenario, new fiscal incentives in some developed countries, together with the advance in the implementation of immunization programs against Covid-19, should promote a more robust recovery in activity throughout the year. The presence of idleness, as well as the communication from the main central banks, suggests that monetary stimuli will have a long duration. However, questions from the markets regarding inflationary risks in these economies can make the environment challenging for emerging countries;

• Regarding Brazilian economic activity, recent indicators show a more positive evolution than expected, despite the intensity of the second wave of the pandemic being higher than anticipated. Prospectively, the uncertainty about the growth rate of the economy still remains above the usual, but little by little it should return to normality;

• With the exception of oil, international commodity prices continued to rise, with an impact on food and industrial goods price projections. In addition, the transition to higher tariff levels should keep inflation under pressure in the short term. The Committee maintains the diagnosis that the current shocks are temporary, but remains attentive to their evolution;

• The various measures of underlying inflation are at the top of the range compatible with meeting the inflation target;

• The inflation expectations for 2021, 2022 and 2023 determined by the Focus survey are around 5.0%, 3.6% and 3.25%, respectively; and

• In the basic scenario, with a trajectory for the interest rate extracted from the Focus survey and the exchange rate starting at R $ 5.40 / US $ *, and evolving according to the purchasing power parity (PPC), Copom's inflation projections are around 5.1% for 2021 and 3.4% for 2022. This scenario assumes an interest rate trajectory that rises to 5.50% pa this year and to 6.25% a.a. in 2022. In this scenario, the projections for inflation of administered prices are 8.4% for 2021 and 5.0% for 2022.

The Committee points out that, in its basic scenario for inflation, risk factors remain in both directions.

On the one hand, the process of economic recovery from the effects of the pandemic may be slower than estimated, producing a path of inflation below expectations.

On the other hand, further extensions of fiscal policies to respond to the pandemic that worsen the country's fiscal trajectory, or frustrations in relation to the continuity of reforms, may put further pressure on the country's risk premiums. The high fiscal risk continues to create a bullish asymmetry in the risk balance, that is, with trajectories for inflation above that projected in the relevant horizon for monetary policy.

Copom reiterates that persevering in the process of reforms and necessary adjustments in the Brazilian economy is essential to allow the sustainable recovery of the economy. The Committee also stresses that questions about the continuity of reforms and permanent changes in the process of adjusting public accounts can raise the structural interest rate of the economy.

Considering the basic scenario, the balance of risks and the wide range of information available, Copom unanimously decided to raise the basic interest rate by 0.75 percentage points, to 3.50% a.a. The Committee understands that this decision reflects its basic scenario and a balance of risks of variance greater than usual for prospective inflation and is compatible with the convergence of inflation to the target in the relevant horizon, which includes the calendar year 2022. Without prejudice to its fundamental objective of price stabilization, this decision also implies smoothing the fluctuations in the level of economic activity and promoting full employment.

At this moment, the basic scenario of the Copom indicates that a partial normalization of the interest rate is appropriate, with the maintenance of some monetary stimulus throughout the economic recovery process. The committee emphasizes, however, that there is no commitment to this position and that future steps in monetary policy may be adjusted to ensure compliance with the inflation target.

For the next meeting, the Committee foresees the continuation of the process of partial normalization of the monetary stimulus with another adjustment of the same magnitude. Copom emphasizes that this view will continue depending on the evolution of economic activity, the balance of risks and the projections and expectations of inflation.

The following Committee members voted for this decision: Roberto Oliveira Campos Neto (Chairman), Bruno Serra Fernandes, Carolina de Assis Barros, Fabio Kanczuk, Fernanda Feitosa Nechio, João Manoel Pinho de Mello, Maurício Costa de Moura, Otávio Ribeiro Damaso and Paulo Sérgio Neves de Souza.

* Amount obtained by the usual procedure of rounding the average exchange rate R $ / US $ observed in the five business days ending on the last day of the week prior to the Copom meeting.