Negative inflation increases pressure to cut interest rates

The drop in the official inflation index in June, announced this Tuesday (11) by the Brazilian Institute of Geography and Statistics (IBGE), is seen as an element of pressure for the Monetary Policy Committee (Copom) of the Central Bank (BC). ) start a cycle of cuts in the basic interest rate, the Selic, starting in August. This is the opinion of economists consulted by Agência Brasil.

The Extended National Consumer Price Index (IPCA) was -0.08% last month. It was the lowest index for a month of June since 2017. The food and beverage and transport groups were the ones that most helped to pull prices down last month.

“Inflation has been on a downward path since February, and the 12-month accumulated is at 3.16%, right in the center of the inflation target. As the Selic rate is to reach this target, the charge for the reduction should gain strength”, says Professor Jorge Claudio Cavalcante, from the Department of Economic Analysis of the Faculty of Economic Sciences of the State University of Rio de Janeiro (Uerj).

Economist Fabio Bentes, from the National Confederation of Trade in Goods, Services and Tourism (CNC), considers the result of the IPCA a “grateful surprise”. “I even expected stability, a slight drop, and there was a retreat a little stronger than expected”, he assesses.

For André Braz, from the Brazilian Institute of Economics at the Getulio Vargas Foundation (Ibre/FGV), there are three main factors that put pressure on the monetary authority. One of them is the diffusion index, which measures the percentage of products and services that registered price increases. This index has been falling. “In June it dropped to 50%. This number two or three months ago was around 60%, so this shows that fewer products and services have risen in price, this is a good indicator, ”he points out.

Another factor, according to Braz, is the so-called core inflation. “The core has the task of measuring the true trend of inflation and, despite being very far from the target, it is showing decelerations, this also anticipates that inflation is actually in a process of reduction”, he analyzes.

The economist also highlights the behavior of food prices. “This is good because it shows that, where the poorest population feels inflation the most, the IPCA is also losing steam. This disinflation process that begins with food favors the condition of monetary policy itself. [controle dos juros]. I would say that we have the elements for a first cut in the basic interest rate at the meeting [do Copom] of August”, points out Braz.

Economist and professor at Ibmec Gilberto Braga believes in a consensus for reducing interest rates, but points out a warning sign that could reduce the size of the cut.

“There was an increase in the price of services, which is an extremely relevant sector within the composition of inflation. It is the only negative point that can be verified in this June IPCA. This removes the possibility, in my view, of a reduction greater than 0.25 percentage points”, he assesses.

consumer’s pocket
Although the food and beverage group had the greatest impact on the decline in prices in June, Professor Jorge Claudio Cavalcante, from Uerj, explains that the population may not necessarily have already felt this relief in their pockets. “We should expect a more pronounced drop until people start to feel relief,” he predicts.

Noting that the IPCA in June pointed to a drop of 8.96% in the price of soy oil, economist Ricardo Caldas, a professor at the University of Brasília (UnB), points out that the consumer gains purchasing power. “It is a very substantial drop and will certainly be reflected in purchasing power because the consumer who saves on soy oil will spend that money left over on other things.”

“The general perception, when you compare it in a longer term perspective, is that food is still expensive, which, in fact, is proven because they have been the villains of inflation since the pandemic. Those who make frequent purchases notice that some items have become cheaper. But those people who don’t usually go to the markets and who remember prices still have a notion that everything is very expensive”, points out Gilberto Braga.

Copom
Professor Marco Antônio Rocha, from the Institute of Economics at the State University of Campinas), relativizes the pressure that negative inflation in June could exert on the Copom.

“Deflation is very concentrated in IPCA items that respond little to monetary policy [taxa de juros]. Food prices are set in the market, and transport prices are administered, so, deep down, monetary policy had little to do with this deflation”, he assesses.

The Copom holds meetings every 45 days, in which it decides on the basic interest rate. Currently, the Selic is at 13.75%, under the justification that it is necessary to fight inflation. At the end of the most recent meeting, on June 21, the Copom issued a communiqué to explain the decision: “The committee assesses that the conjuncture requires patience and serenity in the conduct of monetary policy and recalls that future steps of monetary policy will depend on the evolution of the inflationary dynamics, in particular the components that are more sensitive to monetary policy and economic activity, inflation expectations, in particular longer-term ones, its inflation projections, the output gap and the balance of risks”, emphasizes the note.

High interest is a way to control inflation, as it discourages consumption and makes credit more expensive. However, it is more recessive, affecting economic growth and job creation. For this reason, the government, businessmen and trade union centrals have been pressing for the fall of the Selic rate.

The next Copom meeting will be on August 1st and 2nd. Ricardo Caldas, from UnB, recalls that, in addition to the recent deflation scenario, a change in the composition of the committee increases the pressure for the Selic to fall. The Senate approved, at the beginning of the month, the names of two new directors appointed by the government of President Luiz Inácio Lula da Silva. “The board now is no longer formed only by appointments from the past government. With that, the thesis of reducing the interest rate also gains strength within the Central Bank”, he explains.

Economist Fabio Bentes, from CNC, points out that the country has recorded the lowest accumulated inflation in 12 months since September 2020, at the height of the pandemic. “So this opens up space for some inflection in the country’s monetary policy,” he says. For him, the fact that food prices are on a downward trend means that a change in posture by the Central Bank is not limited to just a cut in the Selic rate, but several reductions.

“[A tendência de queda no preço dos alimentos] is great because it tends to cause inflation throughout this year to continue migrating towards the center of the target, this should cause the BC to start implementing a sequence of cuts in interest rates. Of course, the BC does not look at the June inflation, it no longer looks at the 2023 inflation, it looks at the 2024 inflation.

The target for this year’s inflation is 3.25%, with a variation of 1.5 percentage points up or down. As for 2024 and 2025, the government’s target is an IPCA of 3%, with the same variation interval.

next months
Despite seeing room for the Copom to cut interest rates, economists do not necessarily believe that there will be other results below zero throughout 2023. price of new cars, the IPCA would rise by around 0.05%”, estimates Cavalcante, from Uerj.

“The process of decelerating prices we have seen since January. This should continue in the coming months. This drop should continue, not necessarily generating deflation, but everything indicates that we will have a price index in 2023 lower than that of 2022 [5,79%]and the market is already betting for 2023 on lower inflation, that is, within the target”, explains Caldas, from UnB.

Economist André Braz, from Ibre/FGV, estimates that gasoline should become more expensive in July, due to the return of federal taxes. But without such negative effects for general inflation.

“We are seeing a decompression of more generalized inflation, mainly in food. Cheaper food benefits families, especially the poorest, who commit more of their income to buying food. This shows that the inflationary process will be less cruel to families that have less defense, ”she says.

Gilberto Braga, from Ibmec, points out that the behavior of controlled prices, such as health insurance and public transport, electricity and water tariffs, will still maintain a behavior of continuity in inflation. “We have anniversaries of several important contracts, readjustment of public transport fares in some capitals, and, when you look at inflation in 12 months, you recall this readjustment. That’s one of the reasons why you don’t suddenly drop inflation absurdly abruptly,” he explains.

Professor Marco Antônio Rocha, from Unicamp, also believes that the IPCA will end the year within the BC’s target ceiling. But he points out that Brazil is also exposed to risks that do not depend on Brazilian monetary policy. “There may be other pressures that arise along the way, for example, climate issues make the food price situation very uncertain. There are international turbulences in the conflict zone in Ukraine, which may affect the international market, and there is also the whole behavior of the North American economy, which seems to be gaining momentum”, he lists.

The controlled behavior of the IPCA and an expected cut in the Selic rate are, according to Fabio Bentes, from CNC, a driver for economic growth. “We don’t have major price pressures on the horizon that would allow for excessive caution on the part of the monetary authority. We should end the year with a Selic rate around 12%, which is still very high, but the trend is the beginning of a process of easing and, by the end of 2024, who knows, a Selic close to 9%. We are possibly facing a new cycle of economic expansion.”

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