BC keeps “closed door” to drop interest rates and frustrates government

The Central Bank’s decision to maintain the basic interest rate at 13.75% and the statement released after the meeting frustrated the government’s expectations. Amid the drop in inflation and also in market expectations for price indices for this and the coming years, the Monetary Policy Committee (Copom) did not give any signal about the start of cuts in the Selic rate, which has been at this level since August 2022.

In the note released on Wednesday night (21), the Copom stated that the current scenario is characterized “by a stage of the disinflationary process that tends to be slower and by unanchored inflation expectations”, and which continues to demand “caution and parsimony”. According to the statement, future monetary policy steps will depend on:

• the evolution of inflationary dynamics, especially the components most sensitive to monetary policy and economic activity;
• inflation expectations, particularly longer-term ones;
• the committee’s own inflation projections;
• the output gap (the difference between how much the country can grow without generating inflation and how much it is effectively growing); It is
• of the risk balance.

President Luiz Inácio Lula da Silva (PT) fired again at Roberto Campos Neto, who heads the Central Bank. In Rome, Lula reiterated his criticisms regarding the conduct of monetary policy and said that the president of the Central Bank is playing against the Brazilian economy. “There is no acceptable explanation for why the interest rate is at 13.75%. We have no demand inflation in Brazil.”

Speaking anonymously to the press, members of the economic team classified the Copom note as “horrible and unbelievable” and even as a sign of confrontation with the Central Bank.

They stated that the decision not to give any signal for the beginning of a cycle of Selic declines “forces the hand” and shows a detachment of the BC board in relation to the economic scenario and the efforts to approve the new fiscal framework.

The assessment is that the announcement deviated even from the most conservative readings of the market. The expectations of banks and consultancies collected by the BC itself point to the beginning of interest rate cuts in August, at the next Copom meeting, with a drop of 0.25 percentage points.

The new fiscal framework was approved by the Senate this Wednesday by 57 votes against 17. But, as it was modified by the senators, the text will again pass through the House’s scrutiny, probably in early July.

How the financial market saw BC’s decision and note on Selic

The financial market’s reaction to the Copom decision and note was much milder than the government’s.

“The statement sought to contain an excess of market optimism in relation to the Selic’s downward trajectory”, says Sérgio Goldenstein, chief strategist at Warren Rena.

Some banks are already starting to see a scenario for cutting interest rates only in September. “Although inflation data have evolved more favorably since the last meeting, the Copom brought few elements that indicate the imminent start of the interest rate reduction cycle”, points out a Bradesco report.

“We believe that the committee did not indicate an imminent departure from the strategy of keeping the interest rate at the current level (ie, a cut in August). We still expect the Copom to start the easing cycle at the September meeting”, says Itaú .

The chief economist at XP Investimentos, Caio Megale, assesses that the future steps of monetary policy will depend on new economic data. “We believe that Copom’s strategy is to keep rates stable for a while longer or start a gradual monetary easing soon”, he says.

For the head of research at Genial Investimentos, Eduardo Nishio, the scenario remains undefined. According to him, two countries serve as a reference for the committee: Australia and Canada. In them, central banks had to resume raising interest rates after the process of falling inflation proved to be slower than expected.

Another issue that may have weighed on Copom’s decision is the risk of the fiscal framework suffering additional dehydration. In the Senate, the expenses of the Union with the Fund for the Maintenance and Development of Basic Education and the Valorization of Education Professionals (Fundeb), with the Constitutional Fund of the Federal District (FCDF) and with the areas of science were removed from the spending limit. , technology and inovation.

“The removal of important headings from the spending limit should weigh negatively on the trajectories of both the public debt and inflation”, highlights Nishio.