Economic activity becomes a headache for the BC in setting interest rates

Rising economic activity and a more heated job market entered the Central Bank’s (BC) radar of concerns. The assessment is that this scenario makes the process of reducing inflation more complicated.

The warning was made by the institution’s director of monetary policy, Gabriel Galipolo, on Thursday night (4), during a meeting with employees from Necton Investimentos. According to the newspaper Folha de S. Paulohe said the tighter labor market could contribute to a slower disinflation process.

This means that the next reductions in the Selic rate and the point at which they will end will depend on the behavior of inflation dynamics in the coming months. The warning was also made in the Quarterly Inflation Report, a document that explains strategies to combat inflation. The publication was released on March 28.

The position is similar to that of two other documents published by the BC: the statement from the Monetary Policy Committee (Copom) meeting in which it showed the reasons for the reduction in interest rates from 11.25% to 10.75% per year, published in the on the 20th, and in the minutes of the meeting, published six days later.

The inflation report indicates that Copom’s next analyzes will look mainly at the behavior of components sensitive to monetary policy, such as services inflation, inflation expectations, economic idleness and the behavior of the balance of risks.

The monetary authority’s assessment is that reducing inflation is becoming an increasingly challenging task. The IPCA accumulated over 12 months fell from 10.54%, in February 2022, to 5.60%, in the same month of 2023. Last February, it was at 4.5%.

Another problem that the BC is aware of is the difference in inflation projections in relation to the target established by the National Monetary Council (CMN), which is 3% per year, with an interval of 1.5 percentage points up or down. .

The signal from banks, brokers and consultancies in the Central Bank’s Focus bulletin, this Tuesday (2), was that the IPCA will close 2024 with an increase of 3.75%; 2025, with 3.51%; and 2026 and 2027 by 3.5%,

Economic activity started accelerated in 2024

The BC’s main point of attention in relation to inflation is the behavior of economic activity. Even with interest rates still at high levels, it has shown vigor. The economy grew 2.9% in 2023, more than double what was expected by the monetary authority at the beginning of the year (1.2%).

“Part of this surprise resulted from high increases in agriculture and the extractive industry, but the performance of sectors more related to the domestic economic cycle also exceeded expectations”, emphasizes the report. The movement happened in the first half of the year. In the second, the economy remained practically stagnant.

The year started with a more dynamic economy. The Central Bank’s Economic Activity Index (IBC-Br) increased 0.6% in January, compared to December. Retail trade grew by 2.5% and services grew by 0.7%, IBGE figures show.

The situation continued into February, according to preliminary indicators of economic activity. Vehicle production grew 24.3% compared to January, according to the National Association of Motor Vehicle Manufacturers (Anfavea). The shipment of corrugated paper increased 11.1% compared to the same month last year, according to the Brazilian Paper Packaging Association (Empapel). Truck traffic on toll roads was 0.3% higher compared to January, reported the Brazilian Association of Highway Concessionaires (ABCR).

Another reflection is in the job market. In the first two months of the year, 474.6 thousand formal jobs were opened, 38.6% more than in the same period of 2023, according to the General Register of Employed and Unemployed Persons (Caged).

Unemployment also fell, falling from 8.6% to 7.8% between the moving quarters ending in February 2023 and 2024, points out the Brazilian Institute of Geography and Statistics (IBGE).

Credit numbers have also been improving. The growth rate in 12 months went from 7.6% in January to 8.1% in February, according to data from the Brazilian Federation of Banks (Febraban). The BC projects an increase of 9.4% for 2024.

The situation is similar in the rest of the world

The situation is similar in the rest of the world. The Quarterly Inflation Report warns that optimism about the speed of the fall in global inflation has diminished. The expected moment for the start of interest rate reductions in the main advanced economies has been postponed.

The Central Bank recalls that global activity and job markets abroad continue to demonstrate resilience, even in the face of the more restrictive stance of monetary policy. “The risk remains that inflation, especially core inflation, will remain higher for longer,” highlights the report.

Central economies in the main economies continue to highlight the need to keep interest rates high until they are confident that inflation will reach its targets. In the United States, where the target is 2% per year, accumulated inflation in the 12 months ending in March was 3.8%, according to the US Bureau of Labor Statistics. In the Euro Zone, where the target is also 2%, it was 2.6% in March, according to the European Central Bank (ECB).