BC to cut interest rates to anticipate the external crisis could go wrong, as in 2011, says Itaú – 03/15/2023 – Market

BC to cut interest rates to anticipate the external crisis could go wrong, as in 2011, says Itaú – 03/15/2023 – Market

The problems in the American banking system and the possibility that the US central bank suspends the process of raising interest rates there still do not justify a cut in the basic rate in Brazil. This is the opinion of Itaú Unibanco’s chief economist, Mario Mesquita.

He recalls that in 2011 the Central Bank of Brazil tried to anticipate a supposed problem in the financial system in Europe and gave a hard horse to monetary policy: it cut interest rates about 45 days after announcing an increase in the basic rate.

The result, however, was an increase in inflation, which meant that the Central Bank had to raise the rate to even higher levels later on.

“We still have high inflation, expectations far from the target. Cutting interest rates now in the short term would be risky, with a high chance of going wrong. When in 2011 the Central Bank sought to anticipate the negative shock, putting the target of inflation, it went very wrong,” said Mesquita.

He says that a halt in the US interest rate hike process, or a lower increase than previously projected, are not enough to change the monetary policy scenario in Brazil, although they are factors that should enter into the BC’s projection model, to assessment of the impact on inflation.

Itaú assesses that the most likely scenario is an increase of 0.25 percentage points in US interest rates next week, although the possibility of a pause in monetary tightening is not ruled out if the banking crisis proves to be more serious in the coming days. The bank projects that the rate will go from the ceiling of 4.75% to 5.75% this year, without cuts before 2024.

The credit scenario in Brazil would also not justify an interest rate cut here at this time. Mesquita said he does not see a scenario of credit crisis here, but a normal slowdown in loans in times of high interest rates. Delinquency by individuals is also showing signs of improvement.

Only if recent episodes, such as the Lojas Americanas crisis, intensify the credit slowdown, can there be any change in the outlook for inflation and for monetary policy. In his assessment, this is more of a risk than something concrete at this time.

The economist made a positive assessment of Fernando Haddad’s management in these almost 90 days at the helm of the Ministry of Finance.

He said that the minister is very open to dialogue with society, he had an important victory in the discussion that resulted in the partial re-encumbrance of fuels and now he will carry out a convincing offensive when he announces the new fiscal framework.

He stated, however, that the bank’s corporate clients have a waiting attitude in relation to new investments, while there is no definition on the change in the expenditure ceiling under study and in relation to the tax reform.

Mesquita says he hopes for a rule that allows spending to grow a little above inflation, but that will not slow down the growth of the public debt, although he does not see a problem that will lead to a capital flight crisis or a default. “There are no symptoms that our chronic fiscal problem is turning acute.”

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