BC ignores Lula and indicates it may keep interest rates high or even raise rates

The Monetary Policy Committee (Copom) of the Central Bank ignored pressure from President Luiz Inácio Lula da Silva (PT) and indicated that it may maintain the basic interest rate (Selic) at the current level – the highest in six years – for a ” extended period”, or even raise it.

“Considering the uncertainty surrounding its scenarios, the Committee remains vigilant, assessing whether the strategy of maintaining the basic interest rate for a prolonged period will be able to ensure the convergence of inflation”, says a statement published on Wednesday night (22 ) after maintaining the Selic rate at 13.75% per annum for the fifth consecutive meeting – the second since the beginning of the Lula government.

Although the petista has been demanding a reduction in the rate since the beginning of the year, the maintenance of interest rates this week was expected by the vast majority of bank and consulting analysts. What drew attention was the Copom’s warning that later on it may even “resume the adjustment cycle” – that is, raise the Selic rate – if inflation does not fall within expectations.

“The Committee emphasizes that the future steps of monetary policy can be adjusted and will not hesitate to resume the adjustment cycle if the disinflation process does not go as expected”, says the text.

The Copom communiqué sees the possibility of lowering inflation in cases such as an additional drop (in reais) in commodity prices; a stronger slowdown in the global economy, because of problems in the banking system; and a stronger credit slowdown here in Brazil.

However, the collegiate paid more attention to the increase in inflation expectations since the previous meeting, held in early February. The median of market projections indicates IPCA close to 6% at the end of this year and 4.1% in 2024 – in both cases, above the annual targets of 3.25% and 3%, respectively. The Copom also drew attention to “the uncertainty about the fiscal framework and its impacts on expectations for the trajectory of the public debt”.

Copom’s decision provoked protests from organizations such as the National Confederation of Industry (CNI) and government allies, such as the Central Única dos Trabalhadores (CUT) and PT president, federal deputy Gleisi Hoffmann (PR).

The CNI stated that maintaining the rate is “unnecessary to combat inflation and only brings additional costs to economic activity”. Gleisi asked BC president Roberto Campos Neto directly: “Didn’t you understand your commitment to Brazil? Your interest rates only benefit rentiers and those who don’t produce.”

The Minister of Finance, Fernando Haddad, said he considers the Central Bank statement “worrying”. Despite the text mentioning the uncertainties about the fiscal framework, whose presentation was postponed by order of Lula, the minister understood that the lack of definition did not affect the Copom’s decision.

Real interest rates in Brazil are the highest in the world

According to Infinity Asset, the real interest rate (discounting inflation) in Brazil is the highest among the 40 main economies in the world. The difference between the market DI interest rate and projected inflation for the next 12 months is 6.94%, according to the survey, ahead of Mexico (6.04%) and Chile (4.92%). .

On average across the 40 countries, the real interest rate is negative – that is, lower than inflation – at 1.92% per year. In the United States, which this Wednesday raised the basic rate again, the real interest rate is 0.36% per annum.

Market reactions to the Copom decision

The projections of banks, brokerages and investment houses for the Selic in the coming months vary a lot. According to the Central Bank’s Focus report, there are those who expect a rate of 10.75% per annum in December and there are also those who see the interest rate maintained at 13.75% until then. The median bet is 12.75% per year, which indicates a cut of 1 percentage point until the end of the year.

Just as the guesses vary a lot, the reactions to the Copom note were also varied.

Sérgio Goldenstein, chief strategist at brokerage firm Warren Rena, maintained his forecast that the Selic rate will begin to fall in June and end the year at 11%. However, he said that it increased the chance that the rate will not change by then or that it will only start to fall in the last meetings of 2023, “in view of the harsh tone of the Copom, the increase in inflation projections and the risk that the new framework tax not be seen as credible”.

Bradesco understands that the Copom continues to indicate little room for interest rate cuts. But he pointed out that the announcement of the decision “is compatible” with his expectation that the cycle of falling interest rates will begin in the second half, with the Selic closing the year at 12.25%.

The chief economist at Daycoval Asset, Rafael Cardoso, understood that the Copom statement was “sober because it recognizes new risks on the radar that could be considered bearish for interest rates”, but that such risks “were not enough for the BC to change the flight plan at this time, reinforcing the commitment to the goals”.

For Nova Futura Investimentos, the Copom showed “greater conservatism than anticipated” and “will continue with the posture of waiting and observing” until uncertainties decrease and the fiscal framework justifies a review of posture. “For now, we see no reason to change our scenario and we expect the Selic rate to remain at 13.75% until September 2023, at least”, pointed out the chief economist, Nicolas Borsoi.

XP Investimentos interpreted that the BC’s decision and its communiqué are consistent with its Selic scenario at 13.75% by the end of the year. “We recognize, however, that if the economy slows down more than expected, we may observe a cycle of gradual easing from the second half”, wrote Caio Megale, chief economist.