Central Bank should promote 3rd consecutive interest rate cut this Wednesday, to 12.25% per year

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This is the expectation of most financial market economists. If the cut of this intensity is confirmed, interest rates will fall to the lowest level since May 2022. Analysts’ projection is for a new cut in the basic interest rate this Wednesday. Getty Images The Monetary Policy Committee (Copom) of the Central Bank (BC) meets this Wednesday (1st) and is expected to reduce the economy’s basic interest rate from 12.75% to 12.25% per year. The decision will be announced after 6pm. The 0.5 percentage point cut is what most bank economists are betting on. If confirmed, this will be the third consecutive cut in the Selic rate – which will fall to the lowest level since May 2022, when it was at 11.75% per year. The financial market’s projection is that the interest rate will fall again in December this year and end 2023 at 11.75% per year. For 2024, the estimate is that the Selic rate will close the year at 9.25% per year. How decisions are made To define the basic interest rate and try to contain rising prices, in the inflation targeting system, the BC makes projections for the future. At this moment, the institution is already aiming for next year’s target, and also for the first half of 2025 (in twelve months). This is because changes to the Selic rate take six to 18 months to have a full impact on the economy. Next year’s inflation target, defined by the National Monetary Council (CMN), is 3% and will be considered met if it fluctuates between 1.5% and 4.5%. From 2025 onwards, the government changed the inflation targeting regime, and the target became continuous, at 3%, and could fluctuate between 1.5% and 4.5% without being breached. Last week, financial market economists estimated that inflation in 2024 will amount to 3.90% and in 2025, 3.50%. What analysts say According to the Brazilian Bank Association (ABBC), the interest rate reduction process, which has been indicated by the Central Bank, is capable of continuing this Wednesday, with a cut of 0.5 points percentage, to 12.25% per year. Everton Gonçalves, superintendent of ABBC’s Economic Advisory, assessed, however, that the increase in the public account deficit in the United States has generated an increase in North American interest rates – with an impact on the assets of emerging countries (such as the dollar). “Ultimately, it could compromise the speed of the disinflation process [no Brasil] and, in turn, impose limits on the reduction of the basic interest rate [no país]”, he added. XP assessed, in a statement, that recent data on inflation and activity continue to suggest room for a reduction in interest rates. The institution projected a cut to 12.25% per year, but added that, in its view, an acceleration in the pace of cuts is increasingly less likely “in line with rising US interest rates and fiscal risks [nas contas públicas] persistent in the domestic scenario.” Pedro Oliveira, treasurer of Paraná Banco Investimentos, informed that the BC should highlight the worsening in the international scenario, with rising interest rates in the United States – which could be “sucking up liquidity [dólares] of emerging countries.” “Currently, the zero fiscal deficit scenario for 2024, which would be the goal of the new fiscal framework, is increasingly distant. If developed economies continue to have high interest rates in the long term, emerging countries, such as Brazil, will be under much more pressure to deliver fiscal responsibility to attract capital flows”, added the analyst at Paraná Banco Investimentos. Read also: Haddad announces appointment of Paulo Picchetti and Rodrigo Teixeira to directors of the Central Bank Haddad avoids the question about the target of zero deficit, but says that there is no ‘discommitment’ from Lula Zero deficit: understand how the target can be changed and what it predicts new fiscal rule Consequences of lower interest rates According to experts, the reduction in interest rates in Brazil will have several consequences for the economy. See some of them below: Reduction in bank fees: the tendency is for interest cuts to be passed on to customers. In August, the average interest rate charged by banks in operations with individuals and companies fell for the third month in a row and reached the lowest level since January of this year. The data are from the Central Bank. Economic growth: with lower interest rates, the expectation is that there will begin to be better consumption behavior among the population and, also, an improvement in productive investments, positively impacting the Gross Domestic Product (GDP), employment and income. Activity data has been a positive surprise this year. Improvement of public accounts: interest reductions also benefit public accounts, as they reduce interest expenses on public debt. In 2022, interest expenses totaled R$586 billion. As a percentage of GDP (5.96%), it was the highest level since 2017. Analysts estimated that the reduction in interest rates could generate savings of R$100 billion in 2024. Impact on financial investments: investments in fixed income, such as in Tesouro Direto and in debentures, however, they tend to have a lower yield, over time, than they would have with higher interest rates. With the fall of the Selic, the tendency is for investments in variable income to become more attractive. Experts interviewed by g1 considered, however, that this movement tends to occur over time.

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