With an eye on the US, BC sets interest rates in a more complex scenario

The Monetary Policy Committee (Copom) of the Central Bank sets the basic interest rate (Selic) at the beginning of the night of this Wednesday (22), with an eye on the behavior of the Fed, the central bank of the United States, which hours before it will decide whether or not it continues its cycle of monetary tightening.

Around here, in the midst of a very complex scenario, the expectation of most of the financial market is that the Selic rate will be maintained at 13.75% per annum. Apparently, the pressure for reducing interest rates made since the beginning of the year by President Luiz Inácio Lula da Silva (PT), by his government and also by his party – which called for protests this Tuesday (21) for the departure of BC president Roberto Campos Neto.

The decision of the North American Central Bank is relevant because it affects the flow of money in the world. If interest rates continue to rise, the US tends to attract investments (in Treasury bonds, for example), stimulating the outflow of resources from countries like Brazil. This pushes up the dollar exchange rate, which puts pressure on inflation and interest rates here.

Analysts point out that this Wednesday’s decision is more complex than usual for the BCs of the US and Brazil, due to a series of factors:

• in the US, three banks have collapsed in the last two weeks and a fourth has received bailouts from large local financial institutions. In Brazil, there are the aftermath of the Americanas case and a tightening of the credit market;
• the North American labor market remains heated. Non-agricultural hiring came in above expectations in the first two months of the year, which means maintenance of pressures on inflation;
• inflation remains above targets in the US and Brazil; It is
• in Brazil, the balance of formal employment is still positive, but declining, in line with the slowdown in economic activity observed since the end of 2022.

Both the Fed and the Copom should look at the scenario with greater caution. Part of the potential effects of this scenario are recessive and, in some way, may help fight inflation.

The rise in prices is precisely the main focus of attention of the monetary authorities. In the larger global economy, the Fed’s ultimate goal is 2% inflation per year. In the last calculation, released on the 14th by the US Bureau of Labor Statistics, the accumulated inflation in 12 months until February was 6%.

In Brazil, for a target set at 3.25%, with a tolerance interval of 1.5 percentage points, inflation in the 12 months through February was 5.6%, according to the Brazilian Institute of Geography and Statistics (IBGE).

Even for longer terms, inflation expectations are not accommodated. The bulletin Focus, from BC, showed this Monday (20) an increase in projections for the rise in prices in 2024, from 4.02% to 4.11%. Next year’s target ceiling of 4.5% is getting closer and closer. It also worsened the scenario for 2025 and 2026.

The euro zone has already made a decision regarding the dilemma between prices and the situation of the financial system. In the midst of the collapse of Credit Suisse, which over the weekend ended up being acquired by UBS, the strategy of the European Central Bank (ECB) was to prioritize the fight against inflation. On Thursday (16), the institution raised the basic interest rate by half a percentage point. “There is no choice between financial stability and inflation”, emphasized Christine Lagarde, president of the ECB.

Selic maintenance signaling in Brazil

Expectations for Brazil, according to a survey by the Focus bulletin, indicate that the Copom should maintain the Selic rate at 13.75% per year in the next two meetings – the one ending this Wednesday and the one in early May.

The expectation of the chief economist at Banco Inter, Rafaela Vitória, is that, at the meeting, the Central Bank will indicate a change in the balance of risks for inflation, which makes room for the start of the cut in interest rates earlier than expected.

“The scenario ahead will be one of deceleration in activity. The rise in interest rates in several countries has resulted in an increased risk of recession. Greater caution on the part of investors and banks should reduce the supply of credit”, highlights the Inter economist.

Itaú is more cautious. “The committee should signal that it still sees symmetrical risks to inflation”, point out analysts in a report.

According to them, the Copom should mention that it will continue to follow “with serenity and attention” future developments in fiscal policy, paying attention to the evolution of the country’s fiscal framework and fiscal stimuli that imply sustaining aggregate demand and, additionally, the impacts of recent corporate credit episodes.

Regarding the external scenario, the bank assesses that the BC will continue to monitor the unfolding of banking events (collapse of the SVB and Credit Suisse crisis) with “serenity” and monitor their effects on asset prices and global activity.

Scenarios for a future drop in the Selic rate

XP Investimentos hopes to maintain the rate at 13.75% at this meeting and that the post-decision statement leaves the “doors open” going forward. Economists at the brokerage, however, consider the possibility that cuts occur before the end of the year, depending on the evolution of financial shocks and the way in which the Copom will choose to manage the balance between the slowdown in activity and the convergence of inflation to the targets.

Banco Inter revised its expectation for the beginning of the cycle of cuts in the Selic rate, currently at 13.75%, from August to June. The bank’s argument is that the tightening of the credit scenario and the reduction of the fiscal risk, with the presentation of the new framework, should make it possible to anticipate the reduction in interest rates.

Inter also considers that recent global events – the collapse of three financial institutions in the US, the rescue of a fourth and the crisis at Credit Suisse – have also increased the risk of a recession, reflected in the fall in commodity prices, which may contribute to disinflation.

For economist Sílvio Campos Neto, a partner at Tendências Consultoria, a possible signal for the beginning of the fall in interest rates should only occur at the May meeting. “The Copom will wait for more information about the scenario. Now is the time to analyze the balance of risks”, he says.

Another issue that the committee will pay attention to is the unfolding of the presentation of the new tax rules. According to the economist, it is necessary to see whether they will be reliable and how they will be processed in Congress.

“The ball is in the hands of the Executive”, says the Chief Economist at Porto Asset Management, José Pena. He points out that a robust proposal would make room for appreciation of the Brazilian currency against the dollar, which would enable the fall of commodities in reais and help to bring inflation down.

According to Pena, a series of data should be analyzed by the Copom before taking a decision. On the one hand, inflation does not allow cuts in the Selic rate, due to the behavior of current data and expectations. On the other hand, economic activity is already slowing down due to the rise in the cost of money. “And in the middle is the external issue, which forms a relevant part of domestic inflation”, he says.

BlueLine Asset Management points out that Copom’s decision this week is surrounded by political pressure for a cut in the Selic rate, which is not yet authorized by the fundamentals of inflation.

C6 Bank does not believe in reducing interest rates this year. The bank’s economics team estimates that the BC will keep the Selic at 13.75% until inflation expectations are anchored and that prospective inflation in the BC’s models is on target. “He must make it clear that he will only cut interest rates after these two conditions are met”, write the analysts in a report.

Suno Research, more optimistic, believes that interest rates will begin to fall in August. “Market analysts start to price falls in May or June, but we believe that the processing of the new fiscal anchor should not be so fast, which delays any cut. And the tax reform tends to be voted on in the second half”, says the chief economist, Gustavo Sung.

The situation in the United States

Regarding the US interest rate decision, Sung assesses that the peak of inflation, both there and in the euro zone, seems to be behind us.

“However, it remains at high levels, especially service prices. This is a worrying factor. The data do not give clear signs of convergence towards the long-term goals, which makes the work of BCs more difficult”, he says.

For the economist, despite the recent episodes involving the SVB bank, in the United States, and Credit Suisse, in Switzerland, the expectation is that interest rates will continue to rise. “It is still too early to understand the true size of the problem and, therefore, it should not influence interest rate decisions in the very short term”, he says. His expectation is for a rise of 0.25 percentage points in the US interest rate.

Vitória, from Inter, assesses that the Fed has a difficult decision ahead of it, since the banking crisis is a risk and it is likely that the credit market will suffer an additional tightening in this scenario of greater risk aversion.

“The US monetary authority may choose to take a break to assess developments in the liquidity scenario and resume the upward cycle in May, or it may consider that the instruments to provide liquidity do not interfere with the inflation trajectory and it is still necessary to raise interest rates, as anticipated”, says the economist.