IPCA-15 should not change BC’s stance on interest rates – 04/26/2023 – Market

The deceleration of inflation indicated by the IPCA-15 (National Consumer Price Index 15) released this Wednesday (26) should not be enough, in the evaluation of market specialists, to change the decision of the BC (Central Bank) to keep the Selic rate unchanged at 13.75% at the Copom (Monetary Policy Committee) meeting on May 2nd and 3rd.

Although 12-month inflation measured by the index fell from 5.36% in March to 4.16% in April, reaching the lowest level since October 2020, analysts point out that the result is being significantly influenced by the basis of comparison high from the same period last year, when Russia’s invasion of Ukraine triggered a sharp rise in commodity prices.

Banco Mizuho’s chief strategist for Latin America, Luciano Rostagno says that the majority expectation in the market is that, from the second half of the year, inflation will accelerate again in a significant way.

This is because, in the same period of 2022, the government adopted measures to lower inflation levels due to price pressure brought about by the conflict in Eastern Europe, such as cutting taxes on fuel and electricity. “Quickly we are going to see inflation rising to a level above 6%”, says Rostagno.

After slowing down to 4% in June, 12-month inflation should advance to 5.1% in July, to 5.8% in August, and reach a peak of 6.5% in September, according to Bank calculations. Mizuho. The financial institution projects inflation ending the year at 6.2%.

The chief strategist also says that services inflation, which has been closely monitored by the Central Bank, continued at a high level of 7.6% in the April reading. “Services is a group that the BC has been very concerned about, precisely because it can make inflation more resilient.”

For the Economist at Tenax Capital, Amabile Ferrazoli, observing at what level service inflation will be able to stabilize is important to understand how much work the monetary policy still has to work. She adds that the slowdown in group inflation as a reflection of the effect of monetary tightening on the economy is still ongoing.

Facing the analysis of the inflation data, Rostagno says that he does not see room for the monetary authority to start, or even give indications that it will start cutting interest rates at the meeting in the first week of May. The strategist foresees the beginning of interest cuts only in September, with the Selic at 12.25% in December.

Chief Economist at Ativa Investimentos, Étore Sanchez says that, although the IPCA-15 data has shown a significant deceleration, the structural behavior of inflation, observed by the cores, continues with a much less intense deceleration and at a much higher level, of 8 % to 7.5%.

“We will maintain our perspective of 6.5% for the IPCA this year, and also the projection that the Selic will not find relief so soon”, says Sanchez.

Chief Economist at Mirae Asset Wealth Management, Julio Hegedus Netto recalls that, on the Saturday (25th) Saturday in the Senate, Roberto Campos Neto reinforced his commitment to bringing inflation to the target and the more cautious posture of the monetary authority due to the service and core inflation.

“Our view is that the resilience of service inflation and the pressure on the cores, in addition to the expectation of inflation above the target, are still elements that pressure the BC’s performance”, says Hegedus Netto. In the Focus bulletin, the economists’ projection for the IPCA is at 6.04%, well above the target of 3.25% for 2023, even with the tolerance band of 1.5 percentage points up or down.

The chief economist at Mirae Asset adds that, if inflation continues to slow down and Congress approves a more “realistic” framework, it is possible that the BC will be more flexible in targeting interest rates.

Goldman Sachs analysts also point out that, although the high basis for comparison is contributing to the moderation of annual inflation, price dynamics remain challenging, in a tight labor market scenario, with the adoption of macro and microeconomic policies that include a “considerable fiscal expansion” in 2023 and beyond.

A reflection of the average perception of financial agents that this Wednesday’s inflation data will not be enough to change the BC’s posture can be seen in financial indicators. In the interest rate futures market, which indicates analysts’ forecasts for the direction of monetary policy, short-term contracts operate at a slight increase in the morning of this Wednesday.

The futures interest contract for January 2024 advanced from 13.17% at the close of the day before to 13.20% this Wednesday, while the title for 2025 went from 11.81% to 11.83%.

The agents’ expectation that interest rates will have to remain at a high level for longer, on the other hand, leads to a closing of long-term rates, since a higher interest rate in the short term would allow, in theory, a lower level in the medium term and long term. In this sense, interest rates for January 2027 fell from 11.74% in the previous closing to 11.70%. The title for 2028 fell from 11.94% to 11.88%.