Central Bank suggests it can stop falling interest rates

A three-word change in the statement from the meeting of the Central Bank’s Monetary Policy Committee (Copom) – which this Wednesday (20) decided to cut the Selic rate to 10.75% per year – could represent a change in strategy in combating inflation.

In previous communiqués, committee members had stated that they anticipated “a reduction of the same magnitude in the next meetings”, that is, indicating that they would probably make further cuts of 0.5 points. This time, however, they signaled such a reduction “at the next meeting”. The plural is out, the singular is in.

The document indicates that the Copom assesses that the base scenario has not changed substantially, but that, due to the high uncertainty and the consequent need for greater flexibility in the conduct of monetary policy, the strategy to combat inflation must be affected.

“The members of the Committee, unanimously, chose to communicate that they foresee, if the expected scenario is confirmed, a reduction of the same magnitude at the next meeting”, highlights the statement.

This means that the cycle of reductions of half a percentage point in the Selic at each meeting, practiced since August, may be closer to the end than expected. “Copom asked for permission to think better. Basically, that’s it”, says Paulo Gala, chief economist at Master bank.

Economic activity and inflation cause concern

One of the sources of concern is the behavior of inflation in the coming months. XP Investimentos sees upward risks from now on, motivated, for example, by higher interest rates in the world, especially in the United States, which could put pressure on the real. This Wednesday, the Fed (the American BC) decided to maintain the basic interest rate between 5.25% and 5.50% per year.

Furthermore, underlying inflation – which excludes more volatile items from the basket of products and services used to measure price increases – is above what is compatible with the inflation target, highlights Rafael Cardoso, chief economist at Daycoval Asset.

And it is at this level because of the expansionist tendency of fiscal and parafiscal policies – that is, an increase in public spending – and the increase in real wages, which keeps economic activity relatively heated. The Central Bank’s Economic Activity Index (IBC-Br), considered a preview of GDP, increased 0.6% in January, compared to December, above what the market expected.

Another institution that sees greater uncertainty in the air is Itaú. The bank points out that the committee was right to “shorten its future prescription, amid more uncertainty”, referring to the decision to foresee a half percentage point cut in the Selic just for the next meeting.

The institution assesses that the detailed reasons that led the Copom to take the decision will be better known next Tuesday (26), when the minutes of the meeting will be released.

Nenad Dinic, equity strategist at Swiss bank Julius Baer, ​​also highlights that fiscal uncertainties have increased in the last two weeks, especially after Petrobras’ decision not to distribute extraordinary dividends and announcements by President Luiz Inácio Lula da Silva (PT) to increase government spending.

“Although the 2024 Budget was not affected by these events, the political and fiscal noise could have an impact on the 2025 fiscal targets,” says Dinic.

André Valério, economist at Banco Inter, highlights that the committee’s concern regarding the fiscal framework remains in the air. “The Copom also highlights the importance of executing the target – already established – in anchoring inflation expectations”, he says.

The cards up the BC’s sleeve in relation to interest rates

At least two alternatives could be available to the Copom from June onwards, the market signals: reducing the rate to 0.25 per year in the following meetings or taking a temporary break to better assess the situation.

The chief economist at BV bank, Roberto Padovani, believes in the first thesis: “We maintain our assessment that the evolution of the inflationary scenario and economic activity in the coming months should justify a reduction in the pace in June”.

According to the chief economist at B.Side Investimentos, Helena Veronese, signaling that from now on the committee only foresees a cut of half a percentage point does not mean that other cuts of this size cannot occur in the sequence.. “It does mean that the Bank Central is a little more uncomfortable with the recent scenario”, he states.