inflation report presentation – june 2021
TRANSCRIPT
Inflation ReportJune 24th, 2021
Fabio Kanczuk
Baseline scenario
Global outlook• Fiscal and monetary stimuli in some developed countries promote a robust economic recovery. Due to
economic slack, central bank communication from major economies suggests monetary stimuli will lastlong. However, uncertainty remains high and a new round of market discussion regarding inflationaryrisks in these economies could result in a challenging environment for emerging economies.
Economic activity• Despite the intensity of the second wave of the pandemic, recent indicators continue to evolve better
than expected, implying relevant revisions in growth forecasts. Risks to economic recovery weresignificantly reduced.
Inflation• The persistence of inflationary pressure was more intense than expected, especially in industrial goods.
Additionally, the slow pace of supply normalization, the resilience of demand and implications of theenergy scenario deterioration over electricity fares contribute to keeping inflation under pressure in theshort run, despite the Brazilian real (BRL) recent appreciation. The Committee continues to closelymonitor the evolution of shocks and their possible second-round effects, as well as the behavior ofservice prices as the immunization effects over the economy become more relevant.
3
Global outlook
20
25
30
35
40
45
50
55
60
65
May
18
No
v 1
8
May
19
No
v 1
9
May
20
No
v 2
0
May
21
Manufacturing New export orders Services
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
Jan
20
Feb
20
Mar
20
Ap
r 2
0M
ay 2
0Ju
n 2
0Ju
l 20
Au
g 2
0Se
p 2
0O
ct 2
0N
ov
20
Dec
20
Jan
21
Feb
21
Mar
21
Ap
r 2
1M
ay 2
1Ju
n 2
1
2021 2022
Global Growth
Sources: Refinit and Bloomberg
5
Global GDP growth expectationsGlobal PMI
%
Ind
ex
54.056.059.4
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
CPI services CPI goods (core)
Global core CPI
Sources: Bloomberg and BCB
6
data up to May 2021CPI Good and Services: USA, Euro Area, Japan (only goods), United Kingdom and China weighted by GDP
YoY
(%)
1.6%
2.9%
Inflation in emerging economies
Sources: central banks and national statistical organizations (calculated by BCB)
7
Brasil Chile Mexico Peru Colombia Turkey (off-scale)Russia India South Africa
CPI foodCore CPI (ex-food and energy)CPI
107.7
104.3
105.6
103.6
104.4
108.1
106.8105.3
120.3
97
98
99
100
101
102
103
104
105
106
107
108
109
103.7103.8
104.6
102.3
102.3
105.6
108.0
104.7
120.0
99
100
101
102
103
104
105
106
107
108
109
120.1
107.5
109.2
104.0
115.3
125.5
111.5
104.7107.7
90
95
100
105
110
115
120
125
130
May
21
May
20
Jan
20
Jul 2
0
Sep
20
No
v 2
0
Jan
21
Mar
21
Mar
20
May
21
May
20
Ind
ex (
Jan
/20
=10
0)
Jul 2
0
Sep
20
No
v 2
0
Jan
21
Mar
21
Mar
20
May
21
May
20
Jan
20
Jul 2
0
Sep
20
No
v 2
0
Jan
21
Mar
21
Mar
20
Jan
20
Ind
ex (
Jan
/20
=10
0)
Ind
ex (
Jan
/20
=10
0)
-30
-20
-10
0
10
20
30
40
50
60
70
Jan
20
Feb
20
Mar
20
Ap
r 2
0
May
20
Jun
20
Jul 2
0
Au
g 2
0
Sep
20
Oct
20
No
v 2
0
Dec
20
Jan
21
Feb
21
Mar
21
Ap
r 2
1
May
21
Jun
21
In BRL In USD Exchange rate
Commodity prices (IC-Br)
data up to June 11th
Ch
ange
sin
ce J
an/2
0 (
%)
8
61.1%
30.4%
23.5%
Box – Projections for external accounts in 2021
Current Account and Trade Balance similar tothe previous Inflation Report:
Exports favored by growth of globaleconomic activity and highercommodity prices.
Increased imports due to BRLappreciation and the recovery ofdomestic economic activity.
Increased inflow of liability portfolioinvestments due to higher interest ratesdifferential.
9
US$ billion
2019 2020
IR Mar/21 IR Jun/21
Current account -65 -24 2 3
Balance on goods 27 32 70 70
Exports 226 211 256 280
Imports 199 178 186 210
Services -35 -21 -22 -19
Travel -12 -2 -3 -3
Operating leasing services -15 -12 -11 -8
Primary income -57 -38 -47 -51
Interest -26 -21 -23 -23
Dividends -32 -17 -24 -28
Investments – liabilities 69 11 66 90
DI liabilities 69 34 60 60
Portfolio investment -10 -3 10 21
Other investment 10 -21 -4 91/ Forecast.
20211/
Economic Activity
70
80
90
100
110
Jan
19
Ap
r 1
9
Jul 1
9
Oct
19
Jan
20
Ap
r 2
0
Jul 2
0
Oct
20
Jan
21
Ap
r 2
1
Manufacturing Retail Sales Services
115
120
125
130
135
140
145
150
Jan
15
Jul 1
5
Jan
16
Jul 1
6
Jan
17
Jul 1
7
Jan
18
Jul 1
8
Jan
19
Jul 1
9
Jan
20
Jul 2
0
Jan
21
Monthly3-month moving average
Economic activity
11
Ind
ex (
20
02
= 1
00
) s.
a.
Ind
ex (
20
19
= 1
00
) s.
a.
Manufacturing, retail sales and servicesIBC-Br
Change in AprilMonthly (s.a.) 0.44%Quarterly (s.a.) 1.29%Q/Q-4 6.79%
Sources: BCB and IBGE
99.398.0
102.3
• This box analyzes the relationship between economic activity and pandemic intensity considering a state level panel data.
• The growth of the time fixed effect in the model suggests increased activity level for a given pandemic intensity (emergency aid payments and evolution of international indicators).
• The estimation of the model in rolling windows shows that the magnitude of the coefficient that correlates economic activity and pandemic intensity decreases (reduction in the sensitivity of economic activity to the pandemic intensity, confirming the positive surprise with activity).
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
Apr20 -Jun20
May20 -Jul20
Jun20 -Aug20
Jul20 -Sep20
Aug20 -Oct20
Sep20 -Nov20
Oct20 -Dec20
Nov20 -Jan21
Dec20 -Feb21
Jan21 -Mar21
Feb21 -Apr21
Co
eff
icie
nt
Evolution of the IBCR x pandemic coefficient of inclination
Coefficient of model IBCR x Covid deaths in 3-month moving average. Confidence intervals of 95%
12
Box – Pandemic intensity and economic activity
-12
-10
-8
-6
-4
-2
0
2
4
Apr2020
May Jun Jul Aug Sep Oct Nov Dec Jan2021
Feb Mar Apr
De
c/1
9-F
eb
/20
ave
rag
e (
% c
ha
ng
e)
Time fixed effect – IBCR x pandemic
Time fixed effect of the IBCR x Covid-19 deaths model in the whole sample
GDP – Market expectations (Focus)
13
Focus: expectations up to June 11th
An
nu
al g
row
th (
%)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Jun
19
Sep
19
Dec
19
Mar
20
Jun
20
Sep
20
Dec
20
Mar
21
Jun
21
2021 2022
2.20%
4.85%
Box – Revision of the 2021 GDP projection
14
• Growth projection revised upward due to the better-than-expected Q1 result despite the resurgence of the pandemic.
• Positive prospects for mass vaccination campaign, high commodity prices, and delayed effects of monetary stimulus indicate favorable outlook for the year.
• Among the factors that may slow the growth rate are the risk of resurgence or dissemination of new variants of concern (VOC); the difficulties for procuring inputs in some production chains; and the possible implications of the energy crisis.
2019 2020
GDP at market prices 1.4 -4.1 3.6 4.6
Taxes on products 2.0 -4.9 3.8 7.2
Value added at basic prices 1.3 -3.9 3.5 4.2
Supply
Agriculture and livestock 0.6 2.0 2.0 2.5
Industry 0.4 -3.5 6.4 6.6
Services 1.7 -4.5 2.8 3.8
Demand
Household consumption 2.2 -5.5 3.5 4.0
Government consumption -0.4 -4.7 1.2 0.4
Gross fixed capital formation 3.4 -0.8 5.1 8.1
Exports -2.4 -1.8 5.8 6.8
Imports 1.1 -10.0 5.4 10.7
Net trade contribution (p.p.) -0.5 1.2 0.2 -0.5
Sources: IBGE and BCB
1/ Estimates.
Gross Domestic Product% growth
IR Mar IR Jun
20211/
1
2
3
4
5
6
0
100
200
300
400
500
600
700
800
Mar
20
Ap
r 2
0
May
20
Jun
20
Jul 2
0
Au
g 2
0
Sep
20
Oct
20
No
v 2
0
Dec
20
Jan
21
Feb
21
Mar
21
Ap
r 2
1
May
21
Jun
21
Clothing, hotels, restaurants and beauty salons Total (right)
Positive and negative factors to the economic activity
15
Sources: CIP/Sistema de Liquidação de Cartões (SLC) and FGV
0
5
10
15
20
25
May
13
May
14
May
15
May
16
May
17
May
18
May
19
May
20
May
21
Manufacturing Construction
Restrictive factors – Raw material shortageDebit card – Total expenses
Freq
uen
cy (
%)
BR
L b
illio
n
BR
L m
illio
n
Box – Effects of the pandemic on the seasonal adjustment
16
• Periods with large fluctuations in series make it difficult to estimate seasonal and calendar factors.
• Comparison between conventional seasonal adjustment procedures and an alternative procedure that considers the entire period under the effect of the pandemic shock (data as of March 2020) as outliers.
• Conventional procedure reduces the magnitude of the fluctuation due to second wave.
IBC-Br: seasonally adjusted (conventional and alternative)1/
Monthly change %
GDP: seasonally adjusted (conventional and alternative)
Data up to I 2021
I 2020 -0.3 -2.2 -1.6
II 2020 -10.9 -9.2 -10.3
III 2020 -3.9 7.8 8.3
IV 2020 -1.1 3.2 3.4
I 2021 1.0 1.2 0.5
Data up to IV 2021
I 2021 1.0 1.3 0.5
II 2021 12.1 -0.1 -0.4
III 2021 4.6 0.5 1.2
IV 2021 2.5 0.8 1.2
Carry-over - 0.8 1.4
Q/Q-1
alternative adj.
Q/Q-1
conventional adj.Q/Q-41/
1/ From II 2021 to IV 2021: Focus expectation on June 11th
-10
-8
-6
-4
-2
0
2
4
6
Jan2020
Apr Jul Oct Jan2021
Apr
Conventional adjustment Alternative adjustment
1/ Alternative adjustment includes regressors for additive outliers for Mar/2020 to Apr/2021.
Labor market
17
28
30
32
34
36
38
40
42
44
46
Ap
r 1
2
Ap
r 1
3
Ap
r 1
4
Ap
r 1
5
Ap
r 1
6
Ap
r 1
7
Ap
r 1
8
Ap
r 1
9
Ap
r 2
0
Ap
r 2
1
Formal (Caged) Formal (PNAD) Informal (PNAD)
85
90
95
100
105
110
115
120
125
Mar
12
Mar
13
Mar
14
Mar
15
Mar
16
Mar
17
Mar
18
Mar
19
Mar
20
Mar
21
Caged PNAD CNI
Formal and informal jobs
Sources: BCB, IBGE, ME and CNI
Formal jobs in manufacturing
Ind
ex (
20
19
= 1
00
) 3
MM
A s
.a.
Mill
ion
(s.
a.)
Box – Projections for credit growth in 2021
18
Projection increased from 8.0% to 11.1%, disseminatedamong segments and driven by:
• Higher expected GDP and export sector growth(corporate non-earmarked credit).
• Surprising resilience of household non-earmarkedcredit in face of the worsening pandemic, includinglines associated with consumption, such as vehiclefinancing and credit cards.
• New Pronampe (contribution from FGO) and deferralof payments (corporate earmarked credit).
• Robust demand for housing and rural financing(household earmarked credit) due to low interestrates and sector performance.
Credit outstanding12-month change %
2020 2021Abril IR Mar IR Jun
Total 15.6 15.1 8.0 11.1
Non-earmarked 15.4 14.1 11.1 13.5Households 10.7 14.7 12.0 14.0Companies 21.2 13.4 10.0 13.0
Earmarked 15.9 16.5 3.7 7.7Households 11.7 13.9 11.0 13.0Companies 22.8 20.9 -7.0 0.0
Total households 11.2 14.3 11.5 13.5Total companies 21.8 16.1 3.4 8.0
20211/
1/ Estimates.
Box – Continuous PNAD adjusted to the data collection process
19
• Data collection by telephone, reduction in the number of interviews, and misalignment of the working-age population estimate.
• Two empirical strategies using survey the microdata to estimate alternative series.
• Results for unemployment rate, participation rate and employment are similar to those released by IBGE.
• However, methods are not able to fully correct selection biases in unobservable variables (proportion of individuals with formal occupation varied unevenly).
167
168
169
170
171
172
173
174
175
176
177
I2019
II III IV I2020
II III IV
Mill
ion
Working-age population
Observed Adjusted 1 Adjusted 2
10
11
12
13
14
15
I2019
II III IV I2020
II III IV
%
Unemployment rate
Observed Adjusted 1 Adjusted 2
75
80
85
90
95
100
105
110
abr
18
jul 1
8
ou
t 1
8
jan
19
abr
19
jul 1
9
ou
t 1
9
jan
20
abr
20
jul 2
0
ou
t 2
0
jan
21
abr
21RNR – deflated by IPCARNR – deflated by GDP deflatorIBC-Br
500
700
900
1,100
1,300
1,500
1,700
Ap
r 9
9
Ap
r 0
1
Ap
r 0
3
Ap
r 0
5
Ap
r 0
7
Ap
r 0
9
Ap
r 1
1
Ap
r 1
3
Ap
r 1
5
Ap
r 1
7
Ap
r 1
9
Ap
r 2
1
Deflated by IPCADeflated by GDP deflator
Recurring net revenue1/ and economic activity
Fiscal
20
Sources: STN, IBGE and BCB
Recurring expenses1/
12
-mo
nth
acc
um
ula
ted
, BR
L b
illio
n o
f A
pr/
20
21
Ind
ex (
20
19
= 1
00
) s.
a.
1/ Central Government
Inflation
IPCA – CPI market expectations (Focus)
22
Focus: data up to June 11th
12
-mo
nth
ch
ange
(%
)
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Jan
20
Feb
20
Mar
20
Ap
r 2
0
May
20
Jun
20
Jul 2
0
Au
g 2
0
Sep
20
Oct
20
No
v 2
0
Dec
20
Jan
21
Feb
21
Mar
21
Ap
r 2
1
May
21
Jun
21
2021 2022 2023 2024 2025
3.78% (target 3.5%)
3.25% (target 3.25%)3.25%
5.82% (target 3.75%)
3.25%
1.62
-0.62
0.86
2.41 2.48
2.08
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0Fe
b 2
0
May
20
Au
g 2
0
No
v 2
0
Feb
21
May
21
Food at home Services Industrial goods Administered prices
Recent contribution to inflation
23
Source: IBGE
Administered prices• Oil-derived products: partially influenced by
the significant increase in ethanol.• Electricity: red flag 1 in May.
Market prices• Continued rise in industrial prices: strong
increase in ethanol, pressure from producer prices and the robustness of the demand for goods.
• Conversely, the resurgence of the pandemic and the moderate reduction in mobility contributed to a practically null variation in service prices.
p.p
.
Contributions to IPCA quarterly changes
Conditional projections
Conditional inflation projections
25
• Output gap in the 2021Q2 estimated at -2.5%;
• Output gap close to neutral in 2022;
• Neutral real interest is 3% on the projection horizon.
Inflation projections – Selic from Focus and PPP exchange rate
IPCA change in four quarters (%)
Output gap Output gap ± 2 standard deviations
-6
-5
-4
-3
-2
-1
0
1
2
3
4
IV2003
I2005
I2007
I2009
I2011
I2013
I2015
I2017
I2019
II2021
%
Output gap estimation
%
Y Q. TargetMarch
IR
June
IR
Difference
(p.p.)
2021 II 7.8 8.4 0.6
2021 III 7.0 8.0 1.0
2021 IV 3.75 5.0 5.8 0.8
2022 I 3.9 4.3 0.4
2022 II 3.4 3.5 0.1
2022 III 3.5 3.2 -0.3
2022 IV 3.50 3.5 3.5 0.0
2023 I 3.5 3.7 0.2
2023 II 3.7 3.6 -0.1
2023 III 3.5 3.5 0.0
2023 IV 3.25 3.5 3.3 -0.2
50
100
150
200
250
1.80
1.90
2.00
2.10
2.20
2.30
2.40
2.50
Jan
13
Feb
13
Mar
13
Ap
r 1
3
May
13
Jun
13
Jul 1
3
Au
g 1
3
Sep
13
Oct
13
No
v 1
3
Dec
13
BRL/USD CDS
Box – Risk scenarios for inflation projections
26
• Exchange rate depreciation of 20% in three months.
1. Temporary effect: exchange rate returns to previous levels and there is no change in the neutral rate.
2. Permanent effect: exchange rate does not return; neutral rate rises to 4%.
i) Risk: shock regarding the US monetary policy
Sources: Bloomberg and BCB
Y QBaseline
scenario
Risk scenario 1:
FX remains
Impact
(p.p.)
Risk scenario 2: Exchange
rate returns, neutral rate rises
Impact
(p.p.)
2021 II 8.4 8.4 0.0 8.4 0.0
2021 III 8.0 9.1 1.1 9.1 1.1
2021 IV 5.8 6.3 0.5 7.1 1.3
2022 I 4.3 4.6 0.3 5.9 1.6
2022 II 3.5 3.8 0.3 5.4 1.9
2022 III 3.2 2.5 -0.7 4.4 1.2
2022 IV 3.5 3.2 -0.3 4.7 1.2
Risk scenarioCPI (IPCA) year-over-year change (%)
Exchange rate and CDS
Poin
ts
BR
L/U
SD
Box – Risk scenarios for inflation projections
27
• Scenario 1: exchange rate returns to the end of 2019 level, adjusted by PPP and 5-year CDS.• Scenario 2: commodity prices in USD return to the end of 2019 levels, adjusted by external inflation.• Scenario 3: both exchange rate and commodity prices in USD return to December 2019 level (scenario 2 + scenario 3)
ii) Risk: Risk scenario: reversion of commodity prices expressed in national currency
Y Q BaselineRisk scenario 1:
FX returnsImpact (p.p.)
Risk scenario 2: commodity
prices returnImpact (p.p.)
Risk scenario 3: both
exchange rate and
commodity prices return
Impact (p.p.)
2021 II 8.4 8.4 0.0 8.4 0.0 8.4 0.0
2021 III 8.0 7.8 -0.2 7.6 -0.4 7.4 -0.6
2021 IV 5.8 5.3 -0.5 5.3 -0,5 4.8 -1.0
2022 I 4.3 3.6 -0.7 3.7 -0.6 2.9 -1.4
2022 II 3.5 2.5 -1.0 2.7 -0.8 1.7 -1.8
2022 III 3.2 2.2 -1.0 2.7 -0.5 1.8 -1.4
2022 IV 3.5 2.6 -0.9 3.1 -0.4 2.2 -1.3
Risk scenario: reversion of commodity prices expressed in local currency
CPI (IPCA) year-over-year change (%)
Inflation ReportJune 24th, 2021
Fabio Kanczuk
Conduct of Monetary Policy
Conduct of Monetary Policy – 1
• In its 239th meeting (June 15th and 16th), taking into account the baselinescenario, the balance of risks, and the broad array of available information,the Copom unanimously decided to increase the Selic rate by 0.75 p.p. to4.25% p.a.
• The Committee judges that this decision reflects its baseline scenario forprospective inflation, a higher-than-usual variance in the balance of risks,and it is consistent with convergence of inflation to its target over therelevant horizon for monetary policy, which includes 2022. Withoutcompromising its fundamental objective of ensuring price stability, thisdecision also implies smoothing of economic fluctuations and fosters fullemployment.
30
Conduct of Monetary Policy – 2
• At this moment, the Copom's baseline scenario indicates, as appropriate, anormalization of the policy rate to a level considered neutral. Thisadjustment is necessary to mitigate the dissemination of the temporaryshocks to inflation.
• However, the Committee again emphasizes that there is no commitmentwith this plan, and that future steps of monetary policy could be adjusted toassure the achievement of the inflation target.
31
Conduct of Monetary Policy – 3
• For the next meeting, the Committee foresees the continuation of themonetary normalization process with another adjustment of the samemagnitude.
• However, a deterioration of inflation expectations for the relevant horizonmay require a quicker reduction of the monetary stimulus.
• The Copom emphasizes that its view will also depend on the evolution ofeconomic activity, the balance of risks, and how these factors affect inflationprojections.
32