Copom: understand the messages from the Central Bank about the future of Selic

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Autarchy indicated that new interest rate cuts may come ahead, depending on the evolution of the inflation scenario and activity in the country. The Central Bank’s decision is this Friday (26) Marcello Casal/Agência Brasil The Monetary Policy Committee (Copom) announced this Wednesday (2) the first cut in the basic interest rate (Selic) in three years, from 0 .50 percentage points (pp), at 13.25% per annum. In the communiqué released shortly after the decision, the collegiate indicated that the improvement in the country’s inflation situation allowed the Central Bank of Brazil (BC) to start a “gradual” cycle of interest rate reductions in Brazil. The autarchy also signaled that new cuts of the same magnitude could come in the next meetings, if the expected scenario – of continuity of the disinflation process and anchoring of expectations around its goals – materializes. The decision to cut interest rates was already widely expected by the market. But more than the size of the cut, the financial agents’ great expectation was around the tone adopted by the monetary authority to justify the decision and the collegiate’s signals about how the downturn cycle should be and how long it should last. Understand below the messages from the Central Bank about the future of Selic and the impacts of the decision on the Brazilian economy. Messages from BC According to economists consulted by g1, the communiqué released after the decision brought important messages to be considered for the trajectory of the basic interest rate. Among them: The beginning of the interest rate cut cycle has begun, but the market should keep spirits contained in the projections for the next meetings; The inflationary scenario still presents risks of rising and falling prices ahead and the situation demands “serenity and moderation” in the conduct of monetary policy. Accelerated start, but restrained spirits According to economists, despite the fact that the cut in the basic interest rate by the Copom was a little higher than expected by the market – which forecast a drop of 0.25 pp –, the collegiate made an effort to contain the mood for the projections of the next meetings. More important than the 0.50 pp cut is the communication that followed. […] There was a great concern on the part of the Central Bank, given that it started a little stronger, trying to somehow anchor the market so as not to expect new accelerations in the Selic cuts ahead. The BC’s signal, in this sense, was that if the scenario of disinflation and anchoring of expectations in the country continues, “the members of the Committee, unanimously, foresee a reduction of the same magnitude [ou seja, de 0,50 p.p.] in the next meetings and assess that this is the appropriate pace to maintain the contractionary monetary policy necessary for the disinflationary process.” The communiqué also says that the total magnitude of the Selic reduction cycle over time will depend on the evolution of inflationary dynamics, “in particular the components that are most sensitive to monetary policy and economic activity”, on inflation expectations, in particular the longer-term forecasts, its inflation projections, the output gap and the balance of risks. In addition, another point seen by economists as a way of trying to contain projections of greater falls in the basic rate in the market was the indication that Copom directors were quite divided on the size of the cut they would make at this Wednesday’s meeting. According to a note released by the board, five directors voted in favor of the 0.50 pp cut, while four were in favor of a 0.25 pp reduction. The following voted for the 0.50 pp reduction: president Roberto Campos Neto (nominated by Jair Bolsonaro) Ailton de Aquino Santos (nominated by Lula) Carolina de Assis Barros (nominated by Temer) Gabriel Galípolo (nominated by Lula) Otávio Ribeiro Damaso (nominated by Dilma Rousseff) Voted for the 0.25 pp reduction: Diogo Abry Guillen (nominated by Jair Bolsonaro) Fernanda Magalhães Rumenos Guardado (nominated by Jair Bolsonaro) Maurício Costa de Moura (nominated by Jair Bolsonaro) Renato Dias de Brito Gomes (nominated by Jair Bolsonaro) “This also gives a signal to avoid pricing of more aggressive cuts in the next decisions”, says the chief economist of PicPay, Marco Caruso. “Another point is that he [o Copom] also indicates that it will resist at more contractionary levels, that is, with a Selic above neutral [que não estimula nem desestimula a economia], until disinflation consolidates towards the target and until long-term expectations return to the 3% target”, adds the expert. Interest at 13.25%: how are investments and what are the best options for investing your money Indications on the economy and inflation Other important messages given by the collegiate concern the current national and international economic situation and the balance of risks for the scenario inflationary. According to the statement, for example, recent activity indicators continue to reflect a scenario of economic deceleration in the coming quarters, with indications of an increase in inflation accumulated in 12 months during the second half of the year. “The most recent measures of underlying inflation [também chamada de núcleo da inflação, a medida desconsidera os preços mais voláteis, como energia e alimentação] showed a decrease, but are still above the target”, says the Copom. In addition, the committee also reinforced that its analysis scenarios for inflation still present risk factors for both an increase and a decrease in prices. Among the upside risks, the statement highlighted: greater persistence of global inflationary pressures; greater resilience to services inflation than projected. Among the factors that could lead to a reduction in prices are: a more pronounced deceleration in global economic activity than projected, in particular due to adverse conditions in the global financial system; the impacts of the synchronized monetary tightening on global disinflation turned out to be stronger than expected. What does the BC’s decision mean for the Brazilian economy? Still according to the economists consulted by g1, despite the expectation that the Stock Exchange and the exchange and interest markets will react positively this Thursday (3), the practical effects of the Selic reduction on the consumer end should not yet be visible. “As the market has already priced a lot of interest rate cuts on the future curve, theoretically the decision to [cortar] 0.50 pp doesn’t change much the monetary conditions we have today” says Caruso, from PicPay. We will even start to see some relief in monetary and credit conditions in the sense of lower interest rates, but until that is reflected in more vigorous activity or more expansionist credit, which leads to [o país] to have an improvement in activity, it still takes a long time.

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