BCB Minutes: Evidence of transmission of contractionary monetary policy to economic activity has been gradually accumulating

• Although policy has been playing a decisive role in disinflation, inflation is still being driven by demand.
• Aims to keep policy at a contractionary level to ensure inflation convergence to the target.
• Further deanchoring of longer-term inflation expectations and has been discussing the possible causes of this movement in expectations.

Minutes acknowledging transmission is accumulating while keeping policy contractionary fit a familiar late-cycle pattern for this central bank: the Copom has historically held the Selic at restrictive levels well past the point where activity data confirm the tightening is biting, and it has tended to ease only once expectations re-anchor rather than once activity weakens. The operative distinction in the text is between demand-driven inflation and the deanchoring of longer-term expectations, since it is the latter that has previously kept the board restrictive even as the former softens; a committee publicly discussing the causes of deanchoring is signalling that the easing bar remains high. For BRL, the established transmission runs through the carry: a prolonged restrictive stance supports the currency and the front end of the DI curve, while unanchored expectations steepen the long end and feed the fiscal-risk premium, which has been the recurring counterweight to the rate story in past episodes of this kind. The follow-ons that matter are the inflation expectations surveys and the fiscal headlines out of Brasilia, since in prior cycles it has been the interaction of expectations drift with fiscal slippage, rather than the activity data, that has dictated how long the Selic stays at peak. As minutes rather than a decision, this confirms stance rather than changes it.