At its 231st meeting, the Monetary Policy Committee (Copom) unanimously decided to reduce the Selic rate to 2.25% a.a.

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

Externally, the Covid-19 pandemic continues to cause a marked slowdown in global growth. In this context, despite the significant provision of fiscal and monetary stimulus by the main economies and some moderation in the volatility of financial assets, the environment for emerging economies remains challenging;

In relation to economic activity, the release of GDP in the first quarter confirmed its biggest drop since 2015, reflecting the initial effects of the pandemic. Recent indicators suggest that the contraction of economic activity in the second quarter will be even greater. Prospectively, uncertainty remains above usual about the pace of the economy's recovery during the second half of this year;

The Committee considers that several measures of underlying inflation are below levels compatible with the achievement of the inflation target in the relevant horizon for monetary policy;

The inflation expectations for 2020, 2021 and 2022 determined by the Focus survey are around 1.6%, 3.0% and 3.5%, respectively;

In the hybrid scenario, with a trajectory for the interest rate extracted from the Focus survey and a constant exchange rate of R $ 4.95 / US $ *, Copom's projections are around 2.0% for 2020 and 3.2 % for 2021. This scenario assumes an interest trajectory that ends 2020 at 2.25% pa and rises to 3.00% a.a. in 2021; and

In the scenario with a constant interest rate of 3.00% p.a. and constant exchange rate at R $ 4.95 / US $ *, the projections are around 1.9% for 2020 and 3.0% for 2021.

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

On the one hand, the level of idleness may produce an inflation path below expectations. This risk is intensified if the pandemic is prolonged and causes increases in uncertainty and precautionary savings and, consequently, a reduction in aggregate demand with an even greater magnitude or duration than estimated.

On the other hand, fiscal policies to respond to the pandemic that worsen the country's fiscal trajectory in a prolonged way, or frustrations in relation to the continuity of reforms, can increase risk premiums. In addition, the various credit stimulus and income rebuilding programs, implemented in the fight against the pandemic, may cause the reduction in aggregate demand to be less than estimated, adding an asymmetry to the risk balance. This set of factors potentially implies an inflation trajectory above the projected horizon relevant to monetary policy.

Copom considers 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 reduce the basic interest rate by 0.75 percentage point, to 2.25% 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 2021.

Copom understands that, at this moment, the economic situation continues to prescribe extraordinarily high monetary stimulus, but recognizes that the remaining space for the use of monetary policy is uncertain and must be small. The Committee considers that the fiscal trajectory over the next year, as well as the perception of its sustainability, are decisive for determining the extension of the stimulus.

At this time, the Committee considers that the magnitude of the monetary stimulus already implemented seems compatible with the economic impacts of the Covid-19 pandemic. For the next meetings, the Committee sees it as appropriate to assess the impacts of the pandemic and the set of measures to encourage credit and income recomposition, and anticipates that any future adjustment in the current degree of monetary stimulus will be residual. However, Copom remains attentive to revisions to the economic scenario and inflation expectations for the relevant monetary policy horizon. The Committee recognizes that, in view of the basic scenario and its balance of risks, new information on the evolution of the pandemic, as well as a reduction in fiscal uncertainties, will be essential to define its next steps.