Economists disagree on BC’s interest rate strategy – 06/19/2023 – Market

At the BC (Central Bank) Copom (Monetary Policy Committee) meeting this week, the market’s majority expectation indicates that the Selic rate should remain unchanged at the level of 13.75% per year for the seventh time in a row. The basic interest rate has been at its current level since September 2022.

Over the last few months, President Luiz Inácio Lula da Silva (PT) and members of the government have criticized the BC and its president, Roberto Campos Neto, for the decision to keep interest rates high at a time when inflation seems to be starting to lose power.

While there is a group of financial market economists who consider the monetary authority’s strategy to be correct, considering that it is necessary to control inflation expectations before any easing, there are also those who understand that the Central Bank could have already started the cycle of reducing interest rates compared to the recent dynamics observed among price indices.

Chief economist at asset manager Apex Capital, Alexandre Bassoli says that the better-than-expected performance of the economy and the labor market, and the consequent inflationary pressure generated, justify the action of the monetary authority in order to control the expectations of agents financial.

He adds that, in 2023, inflation is above the upper limit of the target tolerance interval for the third consecutive year.

In this week’s Focus bulletin, the median projections of economists consulted by the BC indicate the IPCA (National Index of Broad Consumer Prices) at 5.12%, compared to a target for the year of 3.25%, with a tolerance band 1.5 percentage points up or down.

“I see no evidence that monetary policy has been kept excessively tight in light of the inflation targets that were set by the National Monetary Council,” says Bassoli.

According to Rafael Ihara, chief economist at manager Meraki Capital, an anticipation of the BC’s interest rate cut cycle at the beginning of the year would have been a mistake on the part of the monetary authority.

“[Os primeiros meses de 2023] they were a moment of questioning the economic policy of the new government, with expectations of rising inflation. An early easing of monetary policy would only reinforce the movement to discourage expectations and raise the cost of bringing inflation to the target”, says Ihara.

With the reduction of uncertainty in relation to economic policy and with inflation expectations in the anchoring process, the beginning of the Selic cut in the third quarter seems “quite reasonable”, says the chief economist at Meraki.

For Miguel Bruno, professor of economics at Faculdade Presbiteriana Mackenzie in Rio de Janeiro, the BC could already have started the cycle of cuts in the Selic rate even during the first half of the year.

He argues that inflation should not serve as an obstacle for the monetary authority to begin to reduce the restriction on credit conditions imposed by the interest rate policy.

This is because the inflationary pressure observed recently, argues Bruno, is much more derived from a restriction on the supply side by companies than due to an excess of demand.

With interest at current levels, companies have been facing increasing difficulties in obtaining financing and promoting new investments in order to increase production, says the Mackenzie-Rio professor.

A survey by CNI (National Confederation of Industry) showed that the high level of interest rates is the main obstacle for companies to gain access to credit.

“The BC adopts a monetarist view, which considers that any type of inflation is due to demand, but this is not true, not least because we know that the Brazilian economy is growing very slowly”, says Bruno.

He adds that, although the GDP (Gross Domestic Product) in the first quarter has exceeded expectations, the result was driven essentially by agribusiness and masked the lower breath of consumption and the weakness of productive investments amid the scenario of high interest rates.

Economics professor at Unifesp and columnist at SheetAndré Roncaglia states that monetary policy has lagged effects that can vary from 12 to 24 months, and, therefore, the BC should consider the impacts of interest rates on the current level for the economy in this horizon when calibrating the Selic rate.

He recalls that companies are already in financial trouble with interest rates at the current level, with an accelerated increase in bankruptcies and requests for judicial recovery, and the tendency is that, without some monetary relief, the picture will only deteriorate even more.

“It is not up to the BC exclusively to follow what the financial market sees of the economy. It is up to it to lead this process”, states Roncaglia.

He claims that the BC’s communication should be improved and become more transparent, to make it clear to society the reasons that support the decisions to keep interest rates stable at the high level they are.

The Unifesp economics professor estimates that the Selic could already be at a level of around 11%, which is the same level that has been practiced by financial agents in the medium-term futures interest market, which embodies expectations about the monetary policy ahead.

“How long do long interest rates need to remain at this level for the BC to convince itself that it is time to reduce the Selic?”, questions the expert.