Under pressure, Central Bank should maintain base interest at 13.75% per year, highest level in six years

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This is the expectation of financial market economists. Despite the high interest rate, the financial market estimates that the inflation target should not be met for the third year in a row. Central Bank headquarters in Brasília Raphael Ribeiro/BCB The Monetary Policy Committee (Copom) of the Central Bank meets this Wednesday (1st) and should keep the economy’s basic interest rate stable at 13.75% per year, according to financial market expectations. This is the highest level since November 2016, that is, in just over six years. If confirmed, this will be the fourth maintenance of the Selic rate at this level. The decision will be announced around 18:30. The expectation of the financial market is that the interest rate will start to retreat only in September of this year, when it would pass to 13.5% per annum. The projection is that the Selic will end 2023 at 12.5% ​​per year. Copom maintains basic interest rate at 13.75% Pressure on BC The first Copom meeting of 2023 takes place under pressure. This month, President Luiz Inácio Lula da Silva openly criticized the current Selic level, which generates high expenses. He has also defended lowering the inflation target — as a strategy to reduce interest rates. This Tuesday (31), the Minister of Finance, Fernando Haddad, said that he had spoken with the president of the Central Bank, Roberto Campos Neto, about measures to make credit cheaper in the country. “I spoke with the president of the BC in São Paulo about a fast credit agenda in Brazil, guarantee system, decrease of the spread, and improvement of the competitive environment so that there is more cheap credit in Brazil. This is a big impediment to economic growth . Expensive credit impedes business”, declared the minister. The Central Bank has autonomy, provided for by law, since 2021. Campos Neto, has a mandate until 2024 and has said that he will remain in office until the end of the period. He has indicated that the BC will react to the increase in public spending authorized through the transition PEC, if necessary, with its main instrument, the Selic rate (increasing or keeping it high). “We have controversial statements regarding the BC’s independence and possible changes in relation to the inflation target. All of this interferes with the dynamics of the yield curve [futuros, que servem de base para as taxas cobradas pelos bancos]”, noted Ricardo Jorge, specialist in fixed income and partner at Quantzed. According to him, the Central Bank may start to reduce the basic rate when it is possible to envision lower inflation. “But this is not the base scenario. Today, we have a scenario of fiscal risks and, until we see inflation actually improving, I believe that the strategy will continue to be to maintain interest rates”, added Ricardo Jorge. Inflation targets To define the level of interest, the Bank The Central Bank is based on the inflation targeting system. When inflation is high, the Central Bank raises the Selic. When inflation estimates are in line with the targets, the Central Bank can reduce the basic interest rate in the economy. At this time, the BC is already adjusting the Selic rate to try to reach the inflation target for the coming years, since decisions on interest rates take from six to 18 months to have a full impact on the economy. For 2023, the inflation target was set 3.25 %, and will be considered formally fulfilled if it oscillates between 1.75% and 4.75%. The inflation target for next year is 3% and will be considered fulfilled if it oscillates between 1.5% and 4.5%. has informed in official documents that it will remain “vigilant”, indicating that it must maintain interest rates high for a “sufficiently prolonged period” of time to contain inflation. And he did not rule out the possibility of raising the Selic rate again. Despite the rhetoric, the Central Bank failed to meet the inflation target in the last two years, when the IPCA was above the ceiling of the target system. And the expectation of the financial market is that the target will not be met again in 2023. Consequences of high interest rates According to experts, high interest rates have several effects on the economy, including: Increase in bank fees: the trend is that new increases are also passed on to customers. In 2022, bank interest rates rose by 8.2 percentage points, more than the increase recorded in Selic. Reduction in population consumption and affects productive investments, negatively impacting the Gross Domestic Product (GDP), employment and income. Last week, analysts projected an expansion of 0.80% for GDP this year, against an estimate of an increase of 3% in 2022. In 2021, GDP grew 5%. Additional expenditure on public debt interest: in 2022, interest expenditure amounted to BRL 586 billion. As a percentage of GDP (5.96%), it is the highest level since 2017. High interest rates put pressure on the public debt, which, if too high, can interfere with investments. Fixed-income investments, such as Treasury Direct and debentures, began to yield more: in 2022, sales of public securities through the Treasury Direct hit a new record.

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