What is needed for the BC interest rate to fall faster – 01/31/2024 – Vinicius Torres Freire

Inflation in 2025 should reach the target, according to Central Bank accounts. Next year’s IPCA would be 3.2%, a price above the target of 3%, according to the BC’s “reference scenario”, the same projection as in December.

What is the basis of this “scenario”? Selic, the basic interest rate, is expected to gradually fall to 9% per year in September and remain there until December (this is the current median of projections by “market” economists). May the dollar and oil prices behave as the BC projects, although only the heavens know what will become of these prices. May the price of electricity remain under the “green flag”.

This means that the real Selic, discounting inflation, would be close to 6% at the end of this 2024, if it remains parked there. It’s horrible and an economic disincentive. For the daily life of ordinary citizens who take out any loans, this means that it will be possible to notice a greater difference in the crunch only from then onwards in the middle of the year.

There was no major news in the statement in which the BC informed its decision to lower the Selic from 11.75% per year to 11.25%. In the next two meetings, apart from larger bumps, the Selic would fall at the same pace, to 10.25%.

In the wholesale money market, where, broadly speaking, loan rates for the government and the interest floor are defined, the inertia is similar. Rates with a term longer than two years fell just one tick compared to August 2023, when the BC began to reduce the Selic. The real interest rate for one year is 6% per year in the market.

As has been obvious, the money owners expect to know: 1) What will happen to the interest rate in the USA (which influences the interest rate floor here); 2) What will happen to Lula’s fiscal target and tax collection. That is, they want to know whether the change in the “zero deficit” target will be big and how big the deficit will be, given the government’s willingness (or not) to contain spending and federal revenue, which was bad last year.

The BC reaffirmed, bidu, that maintaining the “zero deficit” target is essential: “…the Committee reaffirms the importance of firmly pursuing these targets”. A less disturbing fiscal situation should reduce inflation expectations here, if there is no confusion in the US or another accident.

“The market” still expects inflation of 3.8% in 2024 and 3.5% in 2025 (or at least this is part of the price it charges to maintain its assets in reais and which is the basis of the cost of money accounts ). If there is a bigger change in the fiscal target, it will be nonsense.

In short, apart from disasters or miracles, we won’t know anything new until around March. The BC’s next decision on Selic takes place on March 20th, but perhaps only on May 8th (at the next meeting) will the group feel comfortable changing its perspective.

The BC has placed emphasis on the international situation, with a somewhat more optimistic view. The first paragraph of this Wednesday’s statement deals with the “external environment”. That is, the comings and goings of the moods of the world’s big money owners regarding what will become of inflation in the rich world and when an interest rate cut in the USA may occur. This “…scenario continues to require caution on the part of emerging countries.” Further on, the statement reads that “…the situation, particularly due to the international scenario, remains uncertain and requires caution in the conduct of monetary policy”. Of the four risk factors (high or low inflation) mentioned, three concern the international economy.

For those who think this could make a difference, remember that, now, four of the nine members of the BC board are names nominated by Lula. This Wednesday’s decision was unanimous.

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