In the interest game, public deficit and BC’s new management will take the field – 06/27/2023 – Vinicius Torres Freire

The great national quarrel over the measly 0.25 percentage point drop in the Selic should cool down after these minutes of the Central Bank’s board meeting, released this Tuesday. There must be a cut in the Selic, from 13.75% to 13.50%, in August.

The biggest problem, as has been written in these columns, is how fast the Selic will fall and to what level. In this regard, neither the BC minutes nor the inflation news for the time being allow us to estimate that the reduction in interest rates will be quick and large.

Moreover, from now until the end of the year, two reasons will change the music of inflation and interest rates in the market: the size of the deficit in government accounts and the new appointments of Luiz Inácio Lula da Silva to the direction of BC.

As of this half of the year, with the approval of the said fiscal framework by Lula-Haddad, the owners of the big money and the government’s creditors will verify whether the federal collection will be enough to meet the goals of reducing the deficit. If this is not the case, the prospects for public debt sour somewhat more and thus longer-term interest rates in the market place may stop falling.

Fernando Haddad (Finance) and his team are hunting what they call tortoises, congressional or court measures that facilitated legal tax evasion, to put it bluntly. It remains to be seen when the money starts trickling in. The May fundraiser gave some cheer. But the year so far has not yielded enough to reduce the hole in the accounts.

In December, the terms of two BC directors end. By October or November, the names of the new directors should be known. In early 2025, therefore, Lula will have appointed four of the nine directors. Even with Lula 3 still in the minority, so to speak, the style of the BC could change a lot and, thus, change the expectations of the people in the market for 2025. It seems far away, but it is not. In case of messed up nominations, we can see the effects of these decisions already at the end of this 2023.

In summary, the so-called “Copom minutes” states that, with a new low in expectations and inflation, the Selic drops this misery of 0.25 points in August. June inflation should come close to zero. Expectations should drop a little more, not least because the National Monetary Council should not make the mistake of changing the 3% inflation target for the next few years at this Thursday’s meeting, as the BC staff practically demanded.

On the other hand, the Central Bank stated that service inflation and other indices more subject to the influence of monetary policy are still very high (around 6%) and falling slowly. It is implied that the labor market should cool down.

In addition, the BC believes that the real Selic level is now higher, which keeps inflation stable. The BC’s account can be contested, but it’s another bad news about the size and speed of the interest rate cut that is to come. Finally, the level to which interest rates in the rich world will reach will also have an influence here, in dollars and interest rates.

There is a great haze in this scenario. More than usual, it is difficult to know the size of the economic slowdown and the effect of this Selic hit at 13.75% for so long. By the way, the real one-year interest rate has been rising. Since the beginning of April, it went from 6.9% to almost 7.5%.

Perhaps the subject can finally change to the so-called real economy. Which sectors can raise investment? There seems to be something triggered in the extractive industry, in sanitation, in communications. Will the government be able to grant works concessions? Will you take measures to facilitate private investment? Direct public investment, via the Budget, will remain small. What is this “green transition” project in the economy anyway?

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