Copom maintains Selic at 13.75% per year

Between the rapid distancing of inflation expectations from the target and the government’s criticism of the interest rate shock, the Central Bank chose to follow the flight plan and kept the Selic rate at 13.75% per year for the fourth time in a row at the Monetary Policy Committee (Copom).

The inaugural decision for 2023 was a market consensus given the strategy announced by the Copom of rate stability at this level for a “sufficiently prolonged” period and keeps the Selic at the highest level since January 2017. According to a survey by Projeções Broadcast, a news system in State data, all 50 financial institutions consulted expected basic interest rates to remain stable at 13.75% per annum.

In justifying the decision taken this Wednesday, 1st, the BC stated that the decision “reflects the uncertainty surrounding its scenarios and a balance of risks with even greater variance than usual for prospective inflation, and is compatible with the inflation convergence strategy towards the target over the relevant horizon, which includes the years 2023 and, to a greater extent, 2024”. The BC also assessed that, “without prejudice to its fundamental objective of ensuring price stability, this decision also implies smoothing fluctuations in the level of economic activity and fostering full employment”.

Despite the formal autonomy of the Central Bank, which maintains the same composition on the body’s board, the monetary authority quickly became an issue at the beginning of the new government of Luiz Inácio Lula da Silva. In addition to criticisms by the president and finance minister, Fernando Haddad, of high interest rates, Lula also questioned the need for independence in the law and the level of the inflation target.

Added to fears about fiscal sustainability, after the R$ 145 billion spending expansion approved in the Proposal for an Amendment to the Constitution (PEC) of the Transition, the government’s nudges in the BC caused a strong deviation from inflation expectations for 2023 and 2024, but also for terms of 2025 and 2026, outside the relevant Copom horizon.

In the last Focus Bulletin, the median was 5.74% for 2023, above the target ceiling of 4.75%, which points to three consecutive years of noncompliance by the BC with its main mandate, after 2021 and 2022. For 2024 , the market forecast is 3.90%, higher than the central target of 3.00%, but falling short of the upper bound of 4.50%. For 2025 and 2026, the projection was at 3.50%. The target for 2025 is 3.00% and, for 2026, the inflation target has not yet been defined.

Inflation

In the statement, the BC also updated its own projections for inflation. In the reference scenario, which uses an exchange rate varying according to the Purchasing Power Parity (PPC) and interest rates from the Focus Market Report, the BC changed the IPCA projection for 2023 from 5.0% to 5.6%. For 2024, which now has more weight in the relevant horizon, the update was from 3.0% to 3.4%.

The BC once again emphasized the horizon of six quarters ahead in view of the uncertainties about the impact and duration of the current fuel tax exemption policy. In this horizon, which today corresponds to the third quarter of 2024, the projection for the IPCA in 12 months stands at 3.6%.

In this scenario, the BC also considers that the price of oil should approximately follow the future curve for the next six months and start to increase by 2% per year thereafter. It also adopts the hypothesis of a “yellow” tariff flag in December 2023 and 2024.

real interest

Even with the stability of the Selic rate for the fourth consecutive meeting, Brazil continues to have the highest real interest rate (inflation discounted) in the world, in a list of 40 economies. Calculations by the website MoneYou and Infinity Asset Management indicate that the Brazilian real interest rate is now at 7.38% per annum.

In second place in the list that considers the most relevant economies, appears Mexico (5.53%), followed by Chile (4.71%). The average of the 40 countries evaluated is -2.07%.