Copom: Economists expect Selic to remain unchanged – 05/02/2023 – Market

The maintenance of the basic rate (Selic) at the level of 13.75% per annum this Wednesday (3) by the Copom (Monetary Policy Committee) of the Central Bank (BC) is taken for granted by the financial market.

The expectation is that the decision will be accompanied by a tough message, in a conservative tone, about interest rates, in line with recent statements by BC President Roberto Campos Neto in Congress.

For the economists surveyed by the Sheet, it is unlikely that the Copom will signal when interest rates may start to fall. The expectation is that the autarchy’s strategy will remain unchanged despite intense pressure from President Luiz Inácio Lula da Silva (PT) and other members of the government for a relief in rates.

On Labor Day, in a unified act of the union centrals on Monday (1st), Lula returned to criticize the current Selic level.

“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,” he said.

In an interview with Sheet published on Sunday (30), the Minister of Labor, Luiz Marinho, called Campos Neto a “goal tie” in the economy and suggested that the Senate put pressure on the president of BC.

Mauro Rochlin, a professor at FGV (Fundação Getulio Vargas), sees the unyielding stance of the monetary authority as a reflection of this “bombing”, which would have generated an effect contrary to that intended by the government.

“The Central Bank has to show that, in fact, it is autonomous, that it does not bend to pressure and, therefore, adopts the monetary policy that it deems most appropriate. Now, the most appropriate one is that which shows that it has independence”, he says. .

“If this whole debate hadn’t been held in the kitchen, it had been done in a more technical way, I think that at that moment the Central Bank would be more comfortable signaling a more flexible policy.”

The economist considers that the Selic was adjusted by 13.75% per year in a reality very different from the current one and defends the loosening of the monetary policy.

“The rate needed to be recalibrated in the face of a new scenario, even if we consider that there was an artificiality in the reduction [da inflação de 2022], from the pen of the Bolsonaro government. I see no sense in a Selic rate of 13.75%”, he says.

The specialist is referring to the change in the rate of the ICMS (Tax on Circulation of Goods and Services) on fuel, led by then President Jair Bolsonaro (PL) during the electoral race.

“That we may still need a dose of somewhat high interest rates, ok, but it is exaggerated. We have a rate at an incompatible level”, he says.

In the opposite direction, part of the economists considers that the vigor of economic activity and the continuous worsening of inflation expectations show that the domestic scenario still inspires care and justifies the more cautious posture of the Copom.

Leonardo Costa, economist at ASA Investments, highlights the strength of the labor market shown by data from Caged (General Register of Employed and Unemployed), released last Thursday (27). In March, Brazil generated 195,000 formal jobs – an increase of 97.6% compared to the same period in 2022.

“We continued to see worsening expectations and the pace of activity surprising upwards. These are motivators that would hinder the convergence of inflation. The labor market stands out, with Caged very strong last week. And there was a worsening in the average of cores of inflation,” he said.

Despite the deceleration in prices indicated by the IPCA-15 (National Consumer Price Index 15), from 5.36% to 4.16% in the accumulated 12 months, service inflation, which has been closely monitored by BC , continued at a high level in April.

Costa also points out that the reinstatement of taxes on fuels will make inflation accelerate again in the third quarter and stay away from the ceiling of the target of 4.75% for this year – defined by the CMN (National Monetary Council). According to him, maintaining interest rates “seems quite reasonable” given the domestic environment.

Maurício Oreng, superintendent of macroeconomic research at Santander, also sees no exaggeration in the level of interest rates sustained by the Central Bank and argues that the monetary authority works to maintain a low inflation environment so that Brazil can grow sustainably.

“The BC needs a contractionary monetary policy to make the activity lose dynamism. Unfortunately, that’s how it works. It needs to create idleness in the economy to generate space for the reduction of a more cyclical inflation, demand inflation”, he said.

As for the fiscal scenario, since the March meeting, the main change was the presentation of the proposed framework to replace the spending cap. The new rule was delivered to Congress, but the procedure has not yet advanced in the Chamber of Deputies. For the Santander economist, there is still a lot of uncertainty in the scenario.

“We still don’t know the final design of the legislation. At the last meeting, the Copom hinted at how it will incorporate a framework into monetary policy, saying that the connection has to be made through inflation expectations, debt projections and prices assets,” he points out.

In terms of communication, Oreng expects the BC to reaffirm the strategy of sustaining the basic interest rate for a prolonged period until it sees signs of inflation convergence and that it maintains the message about the possibility of raising interest rates again, although he does not understand this phrase as an indication of the Copom’s future steps.

Although not expecting surprises at the Copom meeting, Rafaela Vitória, chief economist at Banco Inter, has a different assessment of the BC’s performance from her peers.

“I agree that expectations are still unanchored and that monetary policy needs to be tight for even longer. But what I think is missing from the debate is a discussion about the degree of tightness. As inflation has dropped from six months to here, we end up having a more restrictive policy because the Selic is stopped”, he says.

For her, the Central Bank is being too tough at the moment and it is necessary to debate the adjustment of the degree of interest rate restriction. “You don’t need such a tight interest rate for inflation that is approaching target,” she adds.

Vitória says she is concerned about the government’s reaction as the Selic remains high for longer. “There is an additional concern with regard to credit, with the government returning with subsidies, with a stronger performance by public banks. This could take power away from monetary policy. It could be negative”, she says.

The chief economist at Banco Inter points out that having a restrictive monetary policy and an expansionist fiscal policy has a very high cost for the economy. “One policy ends up nullifying the effect of the other. The ideal would be for the two to go in the same direction.”