Copom’s three doubts – 03/30/2024 – Samuel Pessôa

Two weeks ago, the Copom (Monetary Policy Committee) reduced the basic interest rate, the Selic, by 0.5 percentage points, from 11.25% to 10.75%.

Additionally, the Copom, in its statement after the decision, wrote that “the Committee members unanimously foresee a reduction of the same magnitude at the next meeting and assess that this is the appropriate pace to maintain the contractionary monetary policy necessary for the disinflationary process” .

The statement from the previous meeting read: upcoming meetings, in the plural. The Copom signaled that at the next meeting, on May 7th and 8th, it will reduce the Selic rate to 10.25% and, at the following meeting, it may reduce the rate of decline from 0.5 to 0.25 percentage points.

Three factors will determine the pace of monetary policy: 1) the evolution of the inflationary process in the USA and the possible cycle of falling interest rates there; 2) the performance of public accounts throughout the year and the Executive’s response to it; 3) the behavior of services inflation.

In the USA, after seven very positive readings, inflation in January and February came out a little salty. Nothing to worry about, but enough to be a cold shower to the “we’ve already won the battle against inflation” climate that prevailed in the markets in December, when Wall Street signaled seven cuts in the American base rate in 2024. Today The market follows the American central bank’s signal of three cuts of 0.25 percentage points throughout the year.

On the fiscal front, the biggest doubt is the degree of revision of the primary target that will probably be made in May. If the revision is very intense, for example from a target of 0% of GDP to a primary deficit of 1%, the new objective will be achieved. Upon reaching the target, none of the triggers and self-corrective mechanisms provided for in the new fiscal framework will be activated. Public debt dynamics will worsen further.

Finally, services inflation, excluding the very volatile item of airline tickets, has run at more than 6% per year in the last three months. It is a fact that increases in services are concentrated at the beginning of the year. However, when we look at 12 months, services still run at 5% per year.

The very tight labor market contributes to the concern about service inflation, with real wages running at 4% per year, well above productivity.

There are signs that there is some slowdown in services inflation and real wages. To be seen.

For now, inflation appears to close the year at 3.5%, but with an unfavorable configuration: industrial goods, due to Chinese disinflation, running at 1%; food at 3% (product inflation at the beginning of the year should reverse in the fall); and services at 4.5%.

We cannot rule out that inflation will rise in 2025. In this case, after the Selic rate reaches a minimum of 9% to 9.5% in 2024, the Central Bank will be forced to start a new cycle of increasing interest rates at some point in the future. second half of 2025.

The point is that we are not experiencing a macroeconomic balance. The public debt in December 2026 will be around 10% to 12% of GDP higher than in December 2022. It is not clear how we will fix the public accounts. The Copom’s three points of attention will also be important in determining the dynamics of public debt.

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