Central Bank says uncertainty about economic growth is ‘above usual’

Charlie Taylor

Despite the positive economic recovery last year and the consistent recovery indicators, the pace of economic growth is still uncertain in the first half of this year in view of the possible effects of the sharp increase in the number of covid-19 cases. The assessment is by the Monetary Policy Committee (Copom) of the Central Bank (BC) and appears in the minutes of the last meeting, released yesterday (23). For Copom, a possible economic reversal due to the worsening of the pandemic would be much less profound than the one seen last year, and “it would probably be followed by another quick recovery”.Central Bank says uncertainty about economic growth is ‘above usual’central bank

central bank

This depends, however, on Brazil's ability to vaccinate the population. "For the committee, the second semester of the year may show a robust resumption of activity, insofar as the effects of vaccination are felt in a more comprehensive way", says the minutes. According to the document, the most frequent indicators suggest that last year's recovery movement extended until February. But this should also be evaluated with caution, due to both the recent inconsistency of economic variables and the change in the holiday calendar at the state level.

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“The committee considers that the pandemic has had heterogeneous effects on the economic sectors, and that government income recovery programs have led the goods sector to operate with low idleness. The Copom estimates that the activity data and the formal labor market data suggest that the idleness of the economy as a whole has reduced more rapidly than expected, despite the increase in the unemployment rate, ”says the minutes.

Central Bank: cenario

In the international scenario, the advance of immunization and new fiscal stimulus should promote a more robust recovery in activity in developed countries. For emerging economies, the environment can be more challenging, given the questioning of the markets regarding inflationary risks in these economies, which have produced a repricing in financial assets.


For the members of the committee, the delay in normalizing the processes of the production chains is putting pressure on production costs and inflation in specific sectors, which also suggests that there is a positive demand in the market. “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 points out 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 ”, says the minutes. In the last week, the BC committee raised the basic interest rate of the economy, the Selic, from 2% to 2.75% per year. It is the main instrument used by the Central Bank to reach the inflation target. The increase in the Selic rate, which serves as a reference for other interest rates in the country, helps to control inflation, because the rate causes reflections in prices, since higher interest rates make credit more expensive and stimulate savings, containing heated demand.


The inflation target for the Broad Consumer Price Index (IPCA) for this year is 3.75%, with a tolerance range of 1.5 percentage points up or down. That is, the lower limit is 2.25% and the upper limit is 5.25%. In February, however, the index closed at 5.2% in the 12-month period, pressured by the dollar and the rise in food and fuel prices. For 2022, the target is 3.5%, also with a tolerance interval of 1.5 points. “The continuation of the recent increase in the price of international commodities in local currency has affected current inflation and caused additional increases in projections for coming months, especially through its effects on fuel prices, ”says the minutes. Although the short-term inflationary pressure is stronger and more persistent than expected, for the Copom, these shocks are temporary.

Economic recovery

Even helping to control inflation, on the other hand, the increase in interest rates makes it difficult for the economy to recover. Even so, given the prospect of a good recovery in the second half, Copom members consider that the current scenario no longer prescribes an extraordinary degree of interest stimulus and should maintain the upward trend in the next Copom meeting, on 4 and 5 of May, unless there is a significant change in inflation projections or the balance of risks. Likewise, the strategy of faster adjustment of the degree of monetary stimulus should reduce the likelihood of non-compliance with this year's inflation target, as well how to maintain the stabilization of expectations for the long term, even in a scenario of temporary increase in social isolation. “GDP ended 2020 with strong growth at the margin, recovering most of the fall observed in the first half, and inflation expectations passed to be above the target in the relevant monetary policy horizon. Additionally, there was an increase in inflation projections to levels close to the upper limit of the target in 2022 ”, says the minutes. The financial market forecast for the IPCA rose from 4.6% to 4.71% this week.


In order to decide on the increase in the Selic rate, the committee established a basic scenario for inflation, with projections of around 5% for 2022 and 3.5% for 2022. This scenario assumes an interest trajectory that rises to 4.5% per year, in 2022, and to 5.5% per year in 2022, as the market predicted last week. In this scenario, the projections for administered price inflation are 9.5% for 2022 and 4.4% for 2022. According to Copom, the basic scenario involves risk factors in both directions. “On the one hand, the worsening of the pandemic may delay the process of economic recovery, producing a lower-than-expected inflation trajectory. On the other hand, a prolongation of fiscal policies to respond to the pandemic that worsens the country's fiscal trajectory, or frustrations in relation to the continuity of reforms, may increase risk premiums. The high fiscal risk continues to create a bullish asymmetry in the risk balance, that is, with trajectories for inflation above the projected horizon relevant to monetary policy ”, says the minutes. (Ag. Brasil). Only click here if you are already an investor The post Central Bank says that uncertainty about the growth of the economy is ‘above usual’ appeared first in 1 Billion Financial Education.

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