BC meets to define basic interest rate under attack by Lula

The eyes of the Planalto Palace are attentive to the decision that the Monetary Policy Committee (Copom) will take this Wednesday (1st) in relation to the basic interest rate (Selic). The market consensus is that it should be maintained at 13.75% per year, to combat inflation and bring expectations closer to the target set by the National Monetary Council (CMN).

President Lula has criticized the interest rate policy. In a meeting with presidents of federal universities on the 19th, he questioned the performance of the autonomous Central Bank and the current level of the Selic rate. “What is the logic behind the mistrust that the market has for everything we talk about investment? I don’t see these people talking about social debt,” he said at the time.

He also criticized the current level of the inflation target, of 3.25% for this year and 3% for 2024, suggesting that a target of 4.5% would be more adequate. This has created huge uncertainty about the direction of future inflation, says Igor Velecico, chief economist and partner at Genoa Capital.

Inflation expectations for the medium and long term are increasing, according to the Focus bulletin, which presents the estimates of institutions consulted weekly by the Central Bank. Projections for the IPCA in 2023 have been increasing for seven weeks and have already reached 5.74%. For the next year, they are also increasing. They were 3.65% four weeks ago and are now at 3.90%.

Projections for the following years live in a similar scenario. The signal for 2025 is an inflation of 3.50%. Four weeks ago it was 3.25%. And for 2026, the numbers also varied in that direction. It is, according to XP Investimentos, a reflection of the risk of more expansionist fiscal and parafiscal policies (public bank credit) ahead and the informal discussion that the CMN may change the inflation target for the coming years.

The worsening in inflation expectations and doubts about fiscal policy also led to increases in the projections for the Selic itself. Until October, the market believed that the rate would end 2023 at 11.25% per annum. Now, the median of the projections is 12.5%.

That is, there is still an expectation that the BC will cut interest rates this year, but the perception is that the room for reductions is smaller. Interest, therefore, will remain at high levels for longer. This worsening mood is reflected in forecasts for next year: the midpoint of expectations for the Selic at the end of 2024 rose from 8% three months ago to 9.5%.

“The scenario for this year and even for the following ones is quite uncertain, given that we have important events ahead, such as the discussion of tax reform and the fiscal framework, among other topics”, says Jaqueline Benevides, fixed income analyst at TC.

The superintendent of the Economic Advisory of the Brazilian Association of Commercial Banks (ABBC), Everton Gonçalves, points out that maintaining the Selic at the current level indicates a reduction in real interest rates, due to the increase in inflationary expectations. “Nonetheless, [a Selic] remains on strongly contractionary ground”, he points out. And, also, at the highest levels among the main economies.

Copom’s “vigilant” stance will be maintained, believes Itaú

Itaú projects that the Copom should reinforce the signaling of the vigilant posture of the monetary policy, to persevere in the disinflation process until the convergence to the targets and the anchoring of expectations are achieved. In the bank’s assessment, the Committee will not hesitate to resume the adjustment cycle (that is, interest rate hikes) if the process of reducing inflation expectations does not occur as expected.

“The committee should also signal that it sees symmetrical risks to inflation, with additional warnings not only for the evolution of public accounts – particularly in light of the projects approved in Congress at the end of last year, with expectations of increased expenses –, but also for the recent debates on the economic/monetary policy framework, in particular, discussions about the definition of inflation targets for the coming years, and their potential impacts on asset prices and anchoring of expectations”, points out Itaú, in a report.