Brazil's Copom: Inflation risks high, expectations de-anchored
The Banco Central do Brasil's Monetary Policy Committee (Copom) noted that inflation expectations remain above target and risks are elevated. The committee emphasized the need for greater and longer monetary restriction amid de-anchored expectations.
Inflation above target, external uncertainty
Brazil's headline and underlying inflation measures accelerated in the first quarter of 2026, exceeding the central bank's target.
Inflation expectations from the Focus survey for 2026 and 2027 stand at 5.30 percent and 4.10 percent, respectively, both above target.
Copom's own projection for the fourth quarter of 2027, the relevant monetary policy horizon, is 3.7 percent in its reference scenario.
The external environment remains highly uncertain due to ongoing conflicts in the Middle East and their impact on global financial conditions, demanding caution from emerging economies.
Uncertainty regarding US economic policy also contributes to this elevated external risk landscape.
The committee noted a further de-anchoring of longer-term inflation expectations, particularly for 2028, which increases the cost of disinflation.
Fiscal policy and labor market resilience
Domestic economic activity showed moderation in growth, as anticipated by the committee, with restrictive monetary policy effects still evident through decelerating credit.
However, the labor market remains resilient, with unemployment at historically low levels and real average incomes rising above productivity growth.
Copom reiterated its view that a weakening of structural reforms and fiscal discipline, coupled with increased directed credit and public debt uncertainty, could raise the economy's neutral interest rate.
This would have detrimental effects on monetary policy's effectiveness and increase the cost of disinflation.
The committee firmly believes that policies must be predictable, credible, counter-cyclical, and harmonious between fiscal and monetary authorities.
No easy path to target
The Copom minutes underscore a challenging inflation landscape, with expectations firmly above target and significant upside risks.
The committee's explicit call for greater and longer monetary restriction highlights the difficulty of bringing inflation down in an environment of de-anchored expectations.
Crucially, the persistent concerns about fiscal discipline and structural reforms suggest that monetary policy is operating under considerable headwinds.