The Central Bank evaluates that the evolution of the labor market and the idleness of the economy are relevant for the behavior of prices ahead, according to the minutes of the Monetary Policy Committee (Copom) published on Tuesday, reinforcing that inflation expectations remain unanchored and a cause for concern.
The document also noted that, after accumulating more evidence, the Central Bank slightly increased the inflationary impact of El Niño on food inflation. This assessment represents a change compared to the analysis made in November, which pointed to a “relatively small impact” of the climatic phenomenon on prices.
The minutes showed that the labor market remains heated in Brazil, with “some moderation on the margin”, emphasizing that data on formal employment remain at high levels and consistent with a very dynamic labor market.
“The prospective evolution of the output gap and the behavior of the labor market were considered very relevant in determining the speed at which inflation will reach the target,” the document stated.
The document also highlighted that there has been an increase in real wage gains in the most recent period, which may reflect temporary issues, without evidence of wage pressures.
“It is important to continue closely monitoring the different variables of the labor market, particularly with a close monitoring of the dynamics of real earnings,” it said.
The Committee considered that the heated labor market and the tight output gap – the space that the economy has to grow until it reaches its maximum capacity and begins to generate inflationary pressure – are a source of uncertainty about the disinflation of several advanced economies.
In a sector considered crucial for the disinflation process, the document stated that the Copom noted “some downward surprise” in the component of underlying services, given that it disregards more volatile items, “which prompted a debate on the reasons for this result.”
According to the minutes, the possibilities for this movement include the normalization of relative prices, the inertial impact of full inflation, the benign behavior of wages, the more pronounced movement of primary shocks from commodities and food, and the lagged impacts of monetary policy.
Regarding domestic activity, the Central Bank stated that although an expected slowdown has been observed, household consumption has once again positively surprised, which may be related to an increase in income due to the expansion of the labor market, social benefits, and gains related to disinflation.
On the other hand, the minutes said that investments in the country continue to decline, after a strong increase during the pandemic period.
“Some members assessed that the persistence of a conjunction of greater resilience in consumption and a fall in investment could potentially cause excess demand compared to supply in the medium term, with potential impacts on prices,” it said.
Last week, the Central Bank decided to make a fourth 0.50 percentage point cut in the Selic rate, to 11.75% per year, and stated that its board foresees equivalent reductions in the coming meetings.
According to the document, the decision of the committee involved the option to maintain its recent communication, “which already includes the appropriate conditionality in an uncertain environment”, specifying the course of action if the expected scenario is confirmed.
This pace of Selic cut, according to the statement, combines a firm commitment to re-anchor expectations and the disinflationary dynamics and the adjustment to the level of monetary tightening in real terms.
The minutes emphasized the need to maintain a still contractionary monetary policy over the relevant horizon to consolidate inflation convergence.
According to the Central Bank, uncertainty, particularly in the international scenario, which has been volatile, prescribes caution in monetary policy, even though the external environment appears to be less adverse.
“There has been significant disinflationary progress, in line with what the Committee anticipated, but there is still a long way to go,” it said.
In the evaluation of ASA Investments economist Leonardo Costa, the tone of the minutes was slightly harsher than that presented in last week’s statement, with the Copom seeing “little to celebrate” in the process of domestic inflation slowing down, reinforcing the need to proceed with caution in the interest rate cut.
“The external surprise also had no effect on the discourse, with the Central Bank indicating that there is no mechanical relationship between the external and domestic interest rates,” he said.