BC indicates high rate for 2023 and raises doubts about GDP

Opportunities for lower interest rates this year are rapidly closing. Four weeks ago, the expectations signaled by brokerages, consultancies and financial institutions in the Focus bulletin, from the Central Bank, was that 2023 would end with the Selic at 12.25% per annum. Currently, the projection is at 12.50%, compared to a rate that was maintained at 13.75% at the last meeting of the BC’s Monetary Policy Committee (Copom), which ended on Wednesday (1st).

One of the factors that has been contributing to this scenario is the deterioration of expectations for inflation, which went from 5.31% in early January to 5.74% this week, according to Focus. This scenario has been influenced by the delay in defining the fiscal framework, the rule for controlling government spending.

It should also reinforce the climate of slowdown in economic activity. The median of projections for the growth of the Brazilian economy in 2023 is 0.8%, also according to Focus. It is almost a quarter of what was registered last year. According to calculations by the International Monetary Fund (IMF), Brazil recorded a 3.1% increase in GDP.

Economic activity tends to be more timid in 2023

“Higher interest rates tend to retract economic activity”, says economist and founding partner of Sarfin consultancy, Bruno Mori. But this is not the only thing that will reduce Brazilian growth.

A study released by Santander, days before the Copom decision, shows that the exhaustion of important growth vectors in 2022, such as the normalization of mobility and the impulse of commodity prices, bring challenges to the dynamics of economic activity in 2023.

On the other hand, the reopening of the Chinese economy, after the end of severe restrictions in the fight against Covid-19, can give a boost, explains Mori. “It makes room for a greater supply of products and inputs.”

Another benefit is that it can help boost economic activity in Brazil, since China is the main destination for Brazilian products abroad, buying mainly soy, iron ore, meat and oil.

There are also other variables at play, says the Sarfin economist: one of them is the continuation of the war between Russia and Ukraine, which leads to a cloudier scenario in relation to energy commodities and fertilizers.

“The BC has been signaling a strategy to maintain interest rates at a high level. In the coming months, the authority will observe the macro conditions (current and prospective) to verify whether, in fact, the flight plan will still be compatible with the convergence of inflation in the relevant horizon (18 months ahead)”, cites Santander.

The financial institution points out that bringing inflation to 3% in the medium term will not be an easy task due to a series of factors:

• The high degree of inflationary persistence generated by a composition where services account for most of the pressures;
• Low economic idleness in general;
• The adoption of fiscal impulses, which are still propagating in the economy; and
• A context of higher international interest rates.

According to the chief economist at Banco Inter, Rafaela Vitória, the Central Bank should proceed with caution in the current scenario, awaiting the evolution of current inflation. A new high is scheduled for February, due to the readjustment of gasoline and education. And, in March, there should be reflections because of the end of the PIS/Cofins exemption on fuels.

Fall forecast pushed forward

Brokers, consultancies and financial institutions have been pushing forward the forecast of the date on which the Copom should change its strategy in relation to interest rates and start lowering it.

“We no longer see the possibility that interest rates will start to fall in the second quarter. We believe that a reduction may only occur in the second half, but everything will depend on the balance of risks, which include the fiscal issue, political factors and the international scenario”, said the chief economist at Messem Investimentos, Gustavo Bertotti.

XP Investimentos is more pessimistic. Since December, the brokerage firm has not seen room for a reduction in the Selic rate in 2023. Tatiana Nogueira, an economist at the brokerage firm, says that the latest Copom statement reinforces the baseline scenario released in December and maintained in January.

The Dutch bank Rabobank sees the possibility of a reduction in the last quarter of the year, as long as the current government maintains its fiscal credibility and expectations for inflation do not deteriorate significantly. “It is expected that the Minister of Finance, Fernando Haddad, will announce a new fiscal framework that will replace the spending ceiling rule in the control of public finances”, quote economists from the institution.

more cautious posture

The last Copom communiqué reiterated a more cautious stance in the face of higher inflation and fiscal noise. “They raise the costs of convergence to the targets established by the National Monetary Council”, says the chief economist at Nova Futura Investimentos, Nicolas Borsoi.

According to Itaú, the committee also highlighted that it remains vigilant, assessing whether the strategy of maintaining the basic interest rate for a longer period will be able to ensure compliance with the inflation targets.

“Again, the text emphasizes that the committee will persevere until it consolidates not only the disinflation process, but also the anchoring of expectations around its goals”, emphasizes Itaú. This means that the future steps of the monetary policy may be adjusted, including an increase in the Selic rate, if the process of reducing inflation does not occur as expected.

“Maintaining higher basic interest rates for a longer period aims to guarantee price stability, but also shows that the Central Bank has chosen to fulfill not only its role in the short term, but also in the long term”, says the chief economist at Daycoval Asset, Rafael Cardoso.