Selic: economists expect a milder tone from BC – 06/20/2023 – Market

Although the consensus of the financial market points to the maintenance of the basic interest rate (Selic) at 13.75% per year this Wednesday (21), there are expectations that the Copom (Monetary Policy Committee) of the Central Bank will adopt a softer in its communication, opening the door to cuts starting in August.

The improvement in the domestic economic scenario since the previous meeting of the BC collegiate, in May, led economists to project the beginning of the Selic decline cycle earlier and also put on the radar the discussion about the magnitude of the cuts until the end of the year .

Among the factors that made the environment more favorable for the loosening of monetary policy ahead, analysts highlight the deceleration of current inflation, the downward bias in inflation expectations, exchange appreciation influenced by the revision of Brazil’s outlook to “positive ” by the risk rating agency S&P Global Ratings, in addition to reducing fiscal uncertainty in the country.

Brazil’s official inflation index decelerated to 0.23% in May, according to data released by the IBGE (Brazilian Institute of Geography and Statistics). In the accumulated in 12 months, the IPCA (National Index of Consumer Prices) retreated to 3.94% – the lowest variation for the month since 2020, when economic activities were paralyzed by the Covid-19 pandemic.

Heron do Carmo, professor at FEA-USP (Faculty of Economics, Administration, Accounting and Actuarial Science, University of São Paulo), estimates an improvement in the inflationary scenario by the end of the year, despite the return of federal taxes on fuels, which their rates zeroed in July last year.

According to the specialist’s calculations, in the last ten years, inflation in the quarter between July and September was around 0.7%. By disregarding the deflation resulting from the artificial fall in administered prices in 2022, he projects an increase of two percentage points in the same period this year.

The indicator would continue to retreat in the last months of the year, closing 2023 in the range of 5%. For Carmo, the evolution of food prices contributes to a downward bias for inflation. “This year we have the prospect of a better harvest, the price of food in the world has been falling and oil price shocks are not expected even by Petrobras’ current policy”, he says.

The economist considers that the BC should “probably” reduce the Selic in August and bets on a cut of 0.5 points in the first movement. “The results of inflation in June and July are very important for the scenario, this could eventually cause the Central Bank to even lower interest rates a little more than the market is thinking”, he says.

Bráulio Borges, associate researcher at FGV Ibre (Brazilian Institute of Economics of the Getulio Vargas Foundation) and senior economist in the Macroeconomics area at LCA Consultores, points out that the financial market is translating the decompression of commodity prices and the easing of global bottlenecks of supplies, in addition to the appreciated exchange rate, in downward revisions to inflation forecasts for this year and next.

According to the Focus bulletin, a weekly BC survey with analysts released on Monday (19), the projection for this year’s IPCA was revised from 5.42% to 5.12%. For next year, the expectation dropped to 4%. For 2025 and 2026, economists’ estimates are at 3.8%.

For the expert, however, the BC’s collegiate is in a “nose snooker” at this week’s meeting because of the lack of definition regarding the inflation targets.

Deliberation on the subject is in charge of the CMN (National Monetary Council), a collegiate formed by the Ministers of Finance (Fernando Haddad) and of Planning and Budget (Simone Tebet), in addition to the BC President (Roberto Campos Neto).

There are great expectations for the next meeting, on the 29th, since the Lula government has already signaled its desire to change the target of the monetary authority in the coming years.

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.

Haddad recently defended an adjustment in the horizon of the goal to be pursued. Today, the Central Bank is targeting the inflation index for the calendar year, but the head of the Treasury was in favor of a target with a moving term, unrelated to the closed year.

“The inflationary scenario is better, it certainly rules out the possibility of an increase in interest rates, but, to talk about reducing interest rates, we have to resolve the issue of the inflation target. Today, it is a factor that certainly restricts the fall of the Selic, since the projected inflation for next year is still above the target”, says Borges.

For him, “turning this page” will help the BC to change its rhetoric and start cutting the basic rate in August. “In monetary policy, as important as the Selic decision itself is communication”, he emphasizes.

The economist considers that, if the exchange rate consolidates at a lower level, there may be a sharper drop in interest rates. The dollar closed the day quoted at R$4.776 on Monday (19), reaching its lowest level since May 2022, with the Copom meeting on investors’ radar.

“There is room for [a Selic] reach high single digits, that is, just below 10%, by the middle of next year. Mainly after the definition of the inflation target, the definitive approval of the fiscal framework, the consolidation of this disinflationary shock of commodities and, more recently, of the exchange rate”, he says.

Igor Rocha, chief economist at Fiesp (Federation of Industries of the State of São Paulo), speaks of “positive timing” for reducing interest rates, with a more favorable balance of risks for inflation, and points out that the long interest rate curve eased significantly, supporting market expectations for monetary policy easing.

He also considers that the decision of the Fed (Federal Reserve, the American central bank) to pause the cycle of high interest rates in the United States, after ten consecutive increases, encourages the action of the Brazilian monetary authority.

“There is a totally favorable environment for the Central Bank to make a more flexible statement at this time so that, at the next meeting, in August, it can cut interest rates by 0.25 percentage points”, he says.

For Rocha, BC already had room to start cutting the Selic since the March meeting. “I understand the interest argument as a bitter medicine, but the difference between poison and medicine is exactly the dose”, she says.

Ariane Benedito, an economist at Esh Capital, joins the market consensus regarding the expectation of cuts starting in August, but differs in terms of the magnitude of this first reduction, projecting a sharper drop —of 0.5 percentage points.

“Looking at the Brazilian history, BC always makes a more expressive adjustment than the rest of the world, and 0.25 [ponto percentual] it doesn’t make much difference in the real economy”, he ponders. Despite the estimate, he admits the possibility of adjustments depending on the communication adopted by the Copom this Wednesday.

What favors this more favorable environment for reducing the Selic rate at the next meeting, in her view, is the deceleration of inflation, which creates a positive statistical load ahead and positively impacts the expectations of economic agents for longer horizons, and the cooling of economic activity. “Fiscal pressures no longer generate instability, it is predictable”, she adds.

A portion of economists, however, considers that the monetary authority will still be a little more conservative in its actions. Fernando Gonçalves, superintendent of economic research at Itaú Unibanco, is part of this group.

“The Central Bank will want to observe this disinflation process, the consolidation of the process of falling inflation expectations, which only started to happen a short time ago, especially in the larger horizons, of 2025 and 2026”, he says.

According to him, the committee should indicate that it will remain vigilant and reiterate the tone of patience and caution, but foresees some adjustments in the BC’s collegiate communication. As an example, he mentions the possibility of the Copom mentioning that it will assess whether the strategy of maintaining the basic interest rate for an “adequate” period, instead of a “prolonged” one, will be able to ensure the convergence of inflation.

For Gonçalves, the Copom’s comfort to start interest rate cuts should still take a little longer, and the first movement may only occur in September, with a reduction of 0.25 percentage points as part of a gradual adjustment in monetary policy .