It seems like many analysts are not expecting a rebound of the Brazilian economy in 2013… it will pretty much more of the same. Here is what Itau’s Chief Economist Ilan Goldfajn wrote about Brazil’s Central Bank published minutes of its Monetary Policy Committee (Copom) meeting in November:

“… In the document, the Copom reiterated its outlook for a rebound in domestic economic activity, partly due to the fact that the meeting was held before the release of weaker GDP data for 3Q12. The Copom also reaffirmed its confidence in the convergence of inflation to the targeted path in the longer term (2014).

According to the Copom, forecasts for the IPCA in 2014 are around the mid-point target in both reference scenario (with interest rates at 7.25% and the exchange rate at 2.10 reais to the dollar through the entire forecast horizon) and market’s scenario (the median forecast for interest rates and the exchange rate by market analysts). In the previous meeting, forecasts through 3Q14 were above the target in both scenarios. Evidence of a cool-down in wholesale prices mentioned by the Copom (paragraph 25) due to the recent decline in commodity prices may explain a large part of the better inflation outlook.

In the minutes, the Copom reaffirmed its growth scenario, which contemplated “a more intense pace of domestic activity this half and next year” (paragraph 25). As inflation forecasts are around the target, any deterioration in the growth outlook could lower forecasts to below the target-range mid-point in 2014. The negative surprise with 3Q12 GDP (released two days after the last Copom meeting) may in fact reduce inflation estimates from current levels and create room, in the Copom’s view, for further stimuli.

Interestingly, there was an indirect reference to the exchange rate as a significant aspect to future Copom decisions: “developments (…) in the asset market are an important part of the context in which future monetary policy decisions will be made” (paragraph 29). Excessive currency depreciation could threaten the convergence of inflation to the target, with consequences for monetary policy. In our view, the Copom works with an exchange-rate forecast that is not much weaker than current levels: “the prospects for the next halves indicate moderation in the price dynamics of some real and financial assets” (paragraph 25).

Due to the scenario faced by the Copom at the time of the meeting, the minutes conclude that “stability of monetary conditions for a sufficiently long period is the most adequate strategy” (paragraph 32).

However, given new information on economic activity, we understand that the Copom will promote new cuts in interest rates next year, as long as the other premises in its basic scenario are maintained – including the exchange rate being kept not much weaker than current levels.

We expect two 50-bp cuts in the Selic rate starting in March 2013, driving the benchmark rate to 6.25%, and remaining at that level until year-end.”

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