Increase in the rate of Selic cuts returns to the market’s radar – 12/11/2023 – Market

The possibility of the Central Bank accelerating the rate of interest cuts in 2024 is back on economists’ radar with the reduction of external risks, a more favorable exchange rate and the prospect of a fall in inflation projections for the following years.

For the last meeting of the year, on Wednesday (13), there is a consensus that the Copom (Monetary Policy Committee) will make a new interest cut of 0.5 percentage points, taking the basic rate (the Selic) to 11 .75% per year.

The expectation is that the decision will be accompanied by a soft message in the statement.

Economists heard by Sheet They estimate that the relief recorded in the international environment since the last meeting, in November, gives more comfort for the BC to follow its strategy for the fourth consecutive meeting.

Andrea Damico, chief economist at Armor Capital, highlights that interest rates on United States Treasury bonds, so-called Treasuries, have dropped significantly and that a view of the more benign behavior of global inflation has been consolidated.

This scenario contributed to the exchange rate appreciation — the dollar ended trading on Friday (8) quoted at R$4.929, compared to R$5 in the Copom reference scenario at the last meeting.

As the exchange rate directly impacts the model used by the BC, inflation projections for 2024 and 2025 should be lower. In Damico’s calculations, the index should fall by around 0.1 and 0.2 percentage points. At the last meeting, Copom estimates stood at 3.6% in 2024 and 3.2% in 2025.

Despite the lower projections, former BC director Alexandre Schwartsman hopes that the Copom will highlight that the estimates are still above the center of the inflation target (3%), justifying the position of holding interest rates in contractionary territory — above neutral (which neither stimulates nor discourages the economy).

In his view, the improvement in the exchange rate “helps, but it is not the salvation of the crop.”

Among the “favorable winds”, economists cite the continuity of the disinflation process and the materialization of the slowdown in economic activity — even though the latest GDP (Gross Domestic Product) data was surprising, with growth of 0.1%.

For Daniel Karp, senior economist at Santander, there was “a somewhat exacerbated conservatism on the part of the BC on the issue of global risk” at the last meeting and a premature fear about the situation.

Although he hopes that the Copom recognizes the improvement in the external environment, he says he believes that the issue will still be treated with caution.

Karp also highlights that the BC board could be more emphatic regarding the improvement in current inflation and classifies as “conservative” the statement that the process has occurred as expected, since the monetary authority has been surprised in its projections.

According to IBGE (Brazilian Institute of Geography and Statistics), the IPCA (Broad National Consumer Price Index) registered a slowdown of 0.24% in October.

As a result, it stood at 4.82% in the 12-month period — close to the target ceiling (4.75%). The November data will be released this Tuesday (12), the day of the first Copom session.

At the next meeting, the market’s attention will be focused, above all, on signaling the next steps.

Since August, when the BC board began the cycle of loosening monetary policy, the Copom has said that “the members of the committee, unanimously, foresee a reduction of the same magnitude in the next meetings”.

This indication corresponds to two subsequent meetings. While a portion of the financial market awaits a repetition of the message, another portion foresees an adjustment in communication with the aim of anticipating changes to the flight plan.

“A way to leave the door open to accelerate the pace [ritmo], without creating too much noise, is to change the plural of ‘upcoming meetings’ to the singular. Therefore, the market understands that [o indicativo] it’s only for January”, says Damico, who sees the possibility of a 0.75 percentage point cut at the second meeting in 2024, in March.

For the Santander economist, there is a small probability that the BC will increase the rate of interest cuts next year.

“Every time he [Copom] advances at a step of 0.5 percentage points, the more difficult it becomes to accelerate [o ritmo de cortes]because it is already closer to the rate [terminal]” says Karp.

To change his base scenario, he says that it is necessary to consolidate the improvement in the global environment in a more significant way, for economic activity to lose even more strength and for inflation expectations to move towards the goals pursued by the BC.

Among the risk factors for high inflation, some economists cite the resilience of the labor market. In the quarter up to October, Brazil’s unemployment rate fell to 7.6% and the number of population employed in some type of work was estimated at 100.2 million, according to IBGE.

Associate professor at UnB (University of Brasília) José Luis Oreiro considers that the data does not reflect the country’s reality and speaks of “disguised unemployment”, with underutilized workers.

He also says that the latest GDP result puts “a little warm water in the bathtub”, showing that the economy is losing traction.

For Oreiro, the weak investment by companies in production capacity and the decline in the vigor of the manufacturing industry are clear signs of weak demand.

In his view, this would be enough for the BC board to make a 0.75 percentage point cut at the next Copom meeting — a scenario that he does not expect to materialize.

“I would like Copom to speed up [o ritmo de corte], I don’t think it will. It’s a discussion that will gain strength in the first half of 2024, when data from the first quarter comes in, which could be negative growth,” she says.

“Also because we will not have the extremely positive contribution of agribusiness to GDP due to El Niño [fenômeno climático]”, he states.

Another divergence among economists refers to the fiscal scenario. Damico sees progress on the issue, with Tax Reform being processed in Congress and approval of measures with the potential to increase the country’s revenue.

Schwartsman says that fiscal uncertainty continues, given the possibility of the Luiz Inácio Lula da Silva (PT) government changing the zero deficit target next year, but that the BC “will play dumb” on the issue.