Central Bank tends to ignore pressure from Lula and maintain interest rates

Again under criticism from President Luiz Inácio Lula da Silva (PT) and ministers, the Central Bank defines this Wednesday (3) the basic interest rate, which serves as a reference for the cost of loans to companies and consumers. The consensus of market analysts is that the Monetary Policy Committee (Copom) will ignore government pressure and keep the Selic at the current level of 13.75% per year. And, judging by statements by BC president Roberto Campos Neto, the beginning of a drop in the rate still doesn’t seem close.

On the Labor Day holiday, in an event with trade union centrals, Lula again criticized interest rates, which he considers responsible for unemployment – ​​the unemployment rate rose to 8.8% in the moving quarter ended in March. “We can no longer live in a country where the interest rate does not control inflation, it controls, in fact, unemployment in that country because it is responsible for part of the situation we are experiencing today”, she said.

Campos Neto, however, signals that the current levels and expectations of inflation do not allow for a loosening of the monetary policy. “Short-term inflation has been falling, but very slowly. The nuclei are still high”, said Campos Neto in a hearing held on April 25 at the Senate Economic Affairs Committee (CAE).

Market expectations for future inflation, always highlighted by the BC in its communiqués, have worsened since the last committee meeting, on March 21st and 22nd. Since then, the median projections for the 2023 IPCA increased from 5.95% to 6.05%. The bets for 2024 and 2025, to which the BC pays even more attention, increased from 4.11% to 4.18% and from 3.9% to 4%, respectively.

Two days after the CAE hearing, the BC president spoke to the Senate plenary alongside ministers Fernando Haddad, of Finance, and Simone Tebet, of Planning. On the occasion, Campos Neto stated that the BC does a technical job and that “it seeks to fulfill its mandate in financial stability always with the lowest possible cost for society”.

“We have a horizon of technical action that, many times, differs from the political cycle, but that we understand – and that is why autonomy was given – that it maximizes the gain for society in the long term”, he said.

Tebet, in response, stated that the BC cannot be based only on technical issues and needs to “focus on public policies and Brazil’s growth”. “The Central Bank cannot consider that its actions are merely technical. They are technical, but they are also decisions that interfere in politics, especially its communiqués and minutes”, pointed out the minister.

Haddad, in turn, said that the Brazilian economy will continue to slow down due to monetary policy to the point of directly impacting tax collection. In the minister’s view, the BC’s decisions must go hand in hand with the government’s fiscal policy.

In addition to talking about inflation, the BC president mentioned credit concessions, which have slowed down slowly, in order to prevent a faster fall in price indices. March data showed a 0.7% rise in loans from the previous month, after two months of declines. “The credit slowdown in Brazil is much lower than that of the developed world and much of the emerging world,” said Campos Neto.

Fiscal policy is also of concern to the monetary authority, even with the presentation, at the end of March, of a new set of rules for public spending.

While praising the efforts of the economic team, Campos Neto said that improving perceptions of public accounts is an ongoing process. “When we look at future curves [dos juros], they begin to show an inversion. They started to get better. With some measures that the government has taken, they have followed this path of improvement.”

Analysts predict that Copom will keep Selic at 13.75%

The bet of keeping interest rates at 13.75% at the meeting that ends this Wednesday is practically unanimous in the market. “Again, the committee must reinforce the signaling of the vigilant stance of monetary policy and perseverance in the disinflation process until convergence to the targets in the relevant horizon”, says Itaú, in a report.

Genial Investimentos argues that, although the preview of April inflation came in below expectations, the cores came with sharp acceleration, which worries the market.

Another fact that makes an upcoming reduction in interest more difficult is the latest data from the credit market, which showed acceleration in concessions. “With this, expectations of maintenance of the basic rate in Brazil are renewed”, says the head of research at Genial, Eduardo Nishio.

XP Investimentos points out that the data published since the last Copom meeting do not suggest significant changes in the inflation scenario. Economic activity indicators point to a smooth deceleration in aggregate demand and a resilient labor market. The brokerage firm expects the Selic cut cycle to begin in August, with a reduction of 0.25 percentage points.

Suno Research is also betting on maintaining interest rates at this Wednesday’s meeting. But, for the analysis house, the economic scenario is better compared to months ago.

“Inflation has been subsiding, even at a slow pace; the international scenario is less deteriorated; lending and economic activity have been slowing down; inflation expectations for longer horizons are more stable. And the fiscal rule was presented”, says the chief economist, Gustavo Sung.

He believes that a window of opportunity has opened for the Copom to begin an initial discussion on interest rate cuts. “It could even lessen the harsh tone of the statement,” he says.

US also sets interest rate on Wednesday

Hours before Copom’s decision, the Fed (the American Central Bank) also defines its basic interest rate. The decision there should have less influence on the Brazilian one.

“The expectation is that the monetary authority [dos EUA] will end the cycle of high interest rates, taking the rate to 5% to 5.25% per year. And in September of this year, the cut in interest rates would already start”, predicts Sung, from Suno Research.

The economist assesses that the market is quite optimistic, with US inflation slowing down. In the 12 months ending in March, it closed at 5%, according to the Bureau of Labor Statistics (BLS). But there are still warning signs in the air, such as food, energy and services.

According to him, the recent episodes in the financial system – with the SVB and Signature problems – seem to be under control. But, as there is still a cooling process in prices and financial uncertainties, the Fed should avoid any kind of sudden movement.

Another factor that leads to this perspective is the resilience of the American economy, points out the chief economist of the Swiss bank Julius Baer, ​​David Kohl.

Matt Peron, director of research at American fund administrator Janus Henderson, points out that the GDP figure in the US – the economy grew 1.1% in the first quarter – revealed a complex economic scenario, with strong demand and inflation.

With that, the US would still not be out of the woods in the fight against lower inflation. “With persistent inflation and lower earnings, markets could face a challenging few months ahead,” she says.

Economist Cláudia Rodrigues, from C6 Bank, also predicts an increase of 0.25 percentage points in the American interest rate. “This increase would be necessary to lead to a deceleration of inflation in a context of still strong demand”, she says. She does not anticipate rate cuts until mid-2024, but says the start could be brought forward if there is a credit crunch stemming from the collapse of some regional banks.