Selic: BC maintains interest rate at 13.75% per year – 06/21/2023 – Market

The Copom (Monetary Policy Committee) of the Central Bank once again ignored pressure from the government of Luiz Inácio Lula da Silva (PT) and businessmen to reduce interest rates and maintained this Wednesday (21) the basic rate (Selic) at 13.75% a year, without signaling a cut ahead. In a statement, the official said that the scenario demanded “caution and parsimony” and said that “patience and serenity” were needed.

The BC collegiate, however, slightly softened the statement by discarding the message that spoke about the possibility of raising the Selic rate again if the disinflation process did not go as expected. At the previous meeting, he had already lowered his tone on this point by stating that an eventual monetary tightening would be a less likely scenario.

Not to mention a drop in interest rates, the Central Bank said that the current situation is characterized by a disinflationary process “which tends to be slower” and by inflation expectations that are still worrying. In addition, the monetary authority defended its flight plan by saying that “the strategy of maintaining the basic interest rate for a prolonged period has proven adequate to ensure the convergence of inflation”.

When talking about the next steps, the Copom limited itself to saying that the decisions depend on different variables.

“The future steps of monetary policy will depend on the evolution of inflationary dynamics, in particular on the components that are most sensitive to monetary policy and economic activity, on inflation expectations, in particular longer-term ones, on its inflation projections, on the output gap [margem que a atividade tem para crescer até atingir sua capacidade máxima] and the balance of risks.”

Supporting the Selic at the current level, in a unanimous decision, was in line with the consensual projection of the financial market that interest rates would remain stable for the seventh consecutive time – the fourth since the beginning of the PT administration. A survey carried out by Bloomberg showed that this was the unanimous expectation among the analysts consulted.

Before the meeting, BC was once again the target of criticism. In addition to pressure from Lula and his ministers, a group of 51 members of the Conselhão (Council for Sustainable Economic and Social Development of the Presidency of the Republic), among them businesswoman Luiza Heleno Trajano, wrote an open letter asking for a cut in interest rates. There was also a protest in front of the BC building in São Paulo, on Tuesday (20), promoted by trade union centrals.

The pro-interest rate cut argues that the domestic economic scenario has improved since the previous Copom meeting, in May, with a deceleration in inflation and a fall in the dollar –influenced by the revision of Brazil’s outlook to “positive” by the rating agency. risk S&P Global Ratings.

In May, the IPCA (Brazil’s official inflation index) decelerated to 0.23%, according to data released by the IBGE (Brazilian Institute of Geography and Statistics). In the accumulated in 12 months, it retreated to 3.94% – the smallest variation for the month since 2020.

In the Copom’s reference scenario, inflation projections for this year improved, dropping from 5.8% to 5% and, for 2024, decreased from 3.6% to 3.4%.

Despite mentioning the recent cooling down of consumer inflation and the perspective of economic deceleration in the coming quarters, the Copom foresees “an increase in the accumulated inflation in 12 months during the second semester”.

In its balance of risks for inflation, the Central Bank continued with the assessment that factors remain in both directions. Among the reasons that would push prices up, he highlighted “some residual uncertainty about the final design of the fiscal framework” and the impacts of the new rule “on expectations for the paths of public debt and inflation, and on risk assets” .

The collegiate also included greater persistence in global inflationary pressures and a larger, or more lasting, deterioration in longer-term inflation expectations.

In the opposite direction, the BC again mentioned the fall in commodity prices, adding that an important part of this movement has already been verified. He also spoke of the possibility of a more pronounced slowdown in global economic activity, driven by adverse conditions in the global financial system, and a greater loss of pace in the domestic granting of credit.

ANALYST SEE CAUTION IN BC DECISION

For Fernando Fenolio, chief economist at WHG (Wealth High Governance), BC showed a more conservative view of the economy and adopted a cautious posture.

According to him, the committee did not “telegraph” the beginning of monetary easing in August and gave indications that its future steps are open. “Cutting might happen if the indicators come in the benign direction, but it might not happen either,” he said.

“He wanted to take some of the fervor out of the market on the issue of cuts, showing that he is going to be conservative and that economic conditions do not seem to open the door to large cuts, at least at the beginning of the cycle,” he said.

Fenolio also highlights the importance of definitions related to inflation targets for the future behavior of expectations, a variable carefully observed by the monetary authority.

“If you keep the target at 3% and the band at 1.5 percentage points, the calendar year falls, chasing inflation in a horizon that the BC determines, if that is the decision, it is possible and likely that the market will cut even more inflation expectations ahead”, he pondered.

The BC’s collegiate decision was taken a week before the CMN (National Monetary Council) meeting, scheduled for the 29th, when the ministers of Finance (Fernando Haddad) and Planning and Budget (Simone Tebet), in addition to the president of the BC (Roberto Campos Neto), should discuss inflation targets.

Lula previously signaled his desire to change the targets of the monetary authority, while Haddad defended an adjustment in the horizon of the inflation target. Currently, the objectives pursued by BC are 3.25% this year and 3% in 2024 and 2025, with tolerance intervals of 1.5 percentage points more or less.

For Caio Megale, chief economist at XP and former special advisor at the Ministry of Economy, the BC collegiate does not seem to be “super excited about the latest inflation data” and conditions the decision of the next meeting to the evolution of the data.

In his view, even if the BC had more conviction about its steps at the next meeting, it would not make sense to commit already.

Megale claims that, although the committee has opened the door a little and signaled the possibility –still uncertain– of interest rate cuts in August, the collegiate’s rhetoric signals that its first movement will not be aggressive, which means an eventual reduction of 0, 25 percentage point.

“He said: now I open the possibility of being able to cut [os juros]but it’s not certain, expectations have to drop a little more, inflation has to keep going in the right direction”, he said.

“And he reinforced parsimony, when he can cut, he won’t cut heavily. He tried to signal that if he continues in that direction, it will [para cortar os juros] and, if it does, it has to be slow”, he added.

Rafaela Vitória, chief economist at Banco Inter, considers that the BC’s speech came in a slightly harsher tone than expected by market agents, but sees an evolution in relation to the statement released in May.

She hopes that the minutes of the meeting, which will be released next Tuesday (27), bring more details about the discussion by the collegiate members regarding the BC’s next steps.

For the expert, the main trigger for the start of cutting interest rates will be the definition of inflation targets. “He is still worried about expectations, which fell very timidly. It was the conditions that improved the least”, she said.

Vitória observes that this factor may have been decisive for maintaining the symmetrical balance of risks (that is, pointing to pressure on prices in both directions). “It is a point that I disagree with, there has been improvement, including the BC’s inflation projections have dropped,” she said.

According to the Focus bulletin, released on Monday (19), analysts’ projections for this year’s IPCA were revised from 5.42% to 5.12%. For next year, the expectation dropped to 4%. For 2025, the economists estimate is 3.8% – above the center of the target.

With 2024 in sight, the BC collegiate will meet again on the 1st and 2nd of August to recalibrate the base rate level.

The cycle of interest rate hikes was interrupted by the Copom in September 2022 after the Central Bank promoted the most aggressive monetary policy tightening since the adoption of the inflation targeting system in 1999.

There were 12 consecutive increases between March 2021 and August last year, with an increase of 11.75 percentage points. The basic rate rose from its historic low (2%) to reach the current interest rate – the highest since the end of 2016.