Selic: BC maintains interest at 13.75% – 02/01/2023 – Market

The Copom (Monetary Policy Committee) of the Central Bank maintained this Wednesday (1st) the basic interest rate (Selic) at 13.75% per year for the fourth consecutive meeting – the first since President Luiz Inácio Lula da Silva (PT) took office.

In the communiqué, the BC collegiate raised the tone and warned about fiscal uncertainties and the worsening of inflation expectations, which are moving away from the target in longer terms. The autarchy also signaled that it should leave interest rates at the current level for a longer time – today the market predicts the beginning of monetary easing in September.

“The Committee reinforces that it will persevere until it consolidates not only the disinflation process but also the anchoring of expectations around its targets, which have shown deterioration in longer terms since the last meeting”, he said.

The decision was in line with the consensual projection of the financial market. A survey carried out by Bloomberg showed that this was the unanimous expectation among the analysts consulted.

Despite the maintenance of the Selic, the announcement takes place amidst an environment of high interest rates, uncertainties related to the fiscal issue and noise generated by speeches by Lula and the top echelon of the government –uncomfortable with the high level of the rate and its negative effects on the economic activity. High basic interest rates make credit more expensive and inhibit population consumption.

For Alexandre Schwartman, former BC director, the monetary authority “came out of the corner hitting”, in analogy to a boxing match. According to him, the committee’s message to the government is clear: “The way things are, I can’t cut interest rates. At least not this year.”

The economist also points out a second warning point made by the Central Bank when associating the fiscal issue with the difficulties of controlling inflation.

Rafaela Vitória, chief economist at Banco Inter, also highlights the tougher tone of the Copom in her communiqué and the BC’s concern with the worsening of expectations, bringing a greater cost to the disinflation process.

For her, the collegiate sends an indirect message to the government of the impact of reduced credibility in the combination of fiscal and monetary policies on interest rates. “He puts up an alternate scenario to make that point,” she says.

“The damage has not been done yet, it will be done if we continue on this path. A lot can change, it is an important message for the government that policies [fiscal e monetária] go together so that you can have a faster drop in interest rates”, he says.

Luiz Felipe Bazzo, CEO of transferbank, also considers that the interest rate cut cycle could be anticipated “with Brazilian inflation still in a slight decline, if it weren’t for the risks linked to policy and fiscal sustainability”.

Uncertainties in the fiscal sphere stem from the possibility of re-encumbering federal fuel taxes as of March and the design of the new rule that will replace the spending ceiling – a mechanism that limits public expenditure growth to the inflation recorded in the previous year.

The approval of the PEC (proposed amendment to the Constitution) that authorized the increase in expenses this year is also pointed out by the market as a sign that the government may be predisposed to a more expansionist fiscal policy (more public spending, which puts pressure on inflation and threaten the balance of government accounts).

Lula’s criticisms of the current inflation target, which is lower than in his previous administrations, also come into play.

In the face of growing fears, inflation expectations for both this year and the next have worsened since the previous meeting, in December 2022.

In the Copom reference scenario, which is based on the premise of the Focus bulletin of interest rate cuts in the second half, ending 2023 with the Selic at 12.5%, inflation projections rose from 5% to 5.6% for this year. For 2024, the board raised the forecast from 3% to 3.4%. On the moving horizon, see the twelve-month inflation projection for the third quarter of 2024 at 3.6%.

The BC also included an alternative scenario, in which the Selic is kept constant throughout its period of action, which today includes the years 2023 and, to a greater extent, 2024, with inflation projections of 5.5% for this year, 3.1% for the third quarter of 2024 and 2.8% for the end of next year.

The monetary authority said it will remain “vigilant” and assess whether the strategy of maintaining the basic interest rate for a “longer” period than in the reference scenario will be able to ensure the convergence of inflation.

“The committee emphasizes that future steps in monetary policy can be adjusted and will not hesitate to resume the adjustment cycle if the disinflation process does not go as expected,” he said.

Andrea Damico, partner and chief economist at Armor Capital, considers that several parts of the statement are more “heavy”. “Before he spoke of a sufficiently prolonged period and now he speaks of a longer period, the BC was not ‘immune’ to the rise in expectations, it reacted and put a tougher tone”, she says.

Inflation projected by the market for 2023 in the Focus bulletin last Monday (30) is 5.74%, almost one percentage point above the target ceiling to be pursued by the Central Bank (4.75%). This would represent overshooting the target for the third consecutive year.

For 2024, the most relevant period for the BC’s performance today, the expectation for the IPCA (National Broad Consumer Price Index) rose from 3.5% to 3.9% –already above the central target (3%).

The collegiate meets again on March 21st and 22nd to recalibrate the base rate level.

The cycle of interest rate hikes was interrupted in September 2022 by the Copom after the most aggressive shock since the adoption of the inflation targeting system in 1999.

There were 12 consecutive increases, with an increase of 11.75 percentage points, from March 2021, when the basic rate left its historic floor (2%), in August of last year.