Three reasons why Selic should fall sharply next year and what to do this year – 11/18/2023 – From Grão to Grão

After economists’ strong forecast error regarding the trajectory of the basic interest rate in the last two years, it is natural to be suspicious. However, this moment is different. It’s not a question of prediction. It is already happening and the monetary authority itself is signaling it. I detail what happened, what is happening and how to position yourself.

Let’s remember what happened in recent years.

Over the first half of 2021, 12-month accumulated inflation jumped from 4.5% per year to 8.35% per year, from December 2020 to June 2021, respectively.

According to the Central Bank’s (BC) Focus report at the end of June 2021, economists’ expectations were that that outbreak of inflation was temporary and would quickly recede. Therefore, the BC would not need to raise the Selic rate much.

At that time, economists projected that the average IPCA in 2022 and the Selic at the end of last year would be 3.78% and 6.5% per year, respectively. With six months to go until the start of 2022, this was the forecast for last year.

The average Selic in 2022 was 12.4% and ended the year at 13.75% per year. The basic interest rate rose more than twice as much as expected.

The CDI accumulated in 2023 should end at 13% per year. Therefore, higher than that of 2022.

The fact that we have experienced this rise in interest rates makes it very difficult to realize that the trajectory has already changed.

At the moment, Selic and CDI are 12.15% per year. Note that this rate is already lower than the average of what occurred in the last two years. The interest rate trajectory has already changed. Remembering my college Calculus classes, the derivative of the CDI evolution curve is already negative.

Additionally, the monetary authority that decides on the future of this rate, the BC Monetary Policy Committee, has already written in its latest statement that, in the next meetings, it should continue reducing interest rates by 0.5% per meeting.

This means that at the end of 2023, the CDI will be 11.65% per year, in January 2024 it will be 11.15% per year and, possibly, in June of next year it will be 9.65% per year.

We can cite three reasons that support the continuation of this decline:
1 – Inflation has already cooled down. The latest data has surprised the market downwards and the annualization of past monthly data already shows that it is within the BC’s target;
2 – The sharp rise in interest rates that occurred across the world is already beginning to have the consequences of slowing global growth, including the Brazilian economy. Lower growth means lower demand and, consequently, lower future inflation;
3 – The real interest rate implicit in the Selic rate is above the maximum observed in the last 15 years. This gives the BC plenty of room to reduce interest rates and still maintain a restrictive rate to contain inflation.

If inflation remains controlled as it is at 4% per year, the Selic rate could fall to 9% in 2024. With this interest rate, the real rate implicit in the Selic will be IPCA+4.8% per year. This rate is higher than the average real rate over the last 15 years, which was IPCA+3.7% per year.

So, take advantage of the fact that there are still excellent interest rates referenced to the IPCA and prefixed at this time to lock in higher rates for the long term.

At this time, interest rates referenced to the IPCA may lose the CDI. This can cause a feeling that you are missing the opportunity to benefit from the current CDI and bring about the fear of changing.

However, instead of being afraid of doing something different now to avoid losing the CDI now, you should be afraid of doing nothing and just having the CDI starting next year.

Michael Viriato is an investment advisor and founding partner of Investor’s House.

Speak directly to me via email.

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