BC to issue new warning on fiscal risk after fuel plan, economists say

The Central Bank’s Monetary Policy Committee (Copom), which was less pessimistic about the fiscal situation in the last two meetings, should once again issue warnings about risks amid the government’s efforts to lower fuel prices using public coffers.

This is the assessment of some economists interviewed by the Sheet on the eve of the collegiate meeting, which will decide this Wednesday (15th) the new level of the basic interest rate (Selic).

The consensual expectation of the market is a rise of 0.5 percentage point, with the Selic going from 12.75% to 13.25% per year. As for the end of the monetary tightening cycle, analysts expect the BC not to rule out a final adjustment in August, given the scenario of persistent and widespread inflation and new perceptions of fiscal risk.

For Alexandre Schwartsman, former director of BC, the collegiate must repeat the harsher tone used in the “minutes of messages”, released in February.

At the time, the Copom stated that “fiscal policies that have a downward effect on inflation in the short term may cause a deterioration in risk premiums, an increase in inflation expectations and, consequently, an upward effect on prospective inflation.”

“They’re going to have to give this warning, basically rescue the language that was used to say ‘this is not how the game is played, don’t come to me to reduce short-term inflation by messing with taxes and, at the same time, compromising financial health. of states and the federal government itself’, even more so to win the election,” he said.

In second place in polls of voting intentions less than four months before the elections, President Jair Bolsonaro (PL) shows concern about the increase in fuel prices, seen as an obstacle to his re-election.

The package of measures includes the PLP (complementary bill) 18, which creates a limit of 17% to 18% on the ICMS rate on fuels, energy, telecommunications and transport, approved this Monday by the Senate, and the PEC (proposal for amendment to the Constitution) on Fuels, which authorizes the federal government to compensate for the loss of revenue from states that have zeroed the ICMS charge on diesel and cooking gas, among other conditions, still in progress.

At the same time, the Executive is willing to zero PIS/Cofins and Cide (Contribution for Intervention in the Economic Domain) of gasoline and ethanol by the end of the year.

Heron do Carmo, professor at FEA-USP (Faculty of Economics, Administration, Accounting and Actuarial Science, University of São Paulo), points out that such proposals can reduce inflation in the short term, but compromise the economy in the coming years. “When you worsen the fiscal situation, you contract higher inflation in the future or make it harder to reduce inflation,” he said.

If approved without changes and with 100% transfer to final prices, these measures could reduce the 2022 IPCA (Broad Consumer Price Index) by up to 3.1%, according to Santander’s estimate. On the other hand, the bank forecasts an increase of 0.6% in its inflation projections for 2023, which is the BC’s monetary policy horizon.

“I believe that the Central Bank can address the fiscal issue within the scope of the balance of risks for inflation, since some of the measures being debated in Congress may affect the process of anchoring inflationary expectations,” said Mauricio Oreng, superintendent of macroeconomic research. of Santander.

The Focus bulletin, last released on June 6 (partially, due to the strike by BC civil servants), showed a successive deterioration in inflation expectations for both this year and 2023 — with projections of 8.89. % and 4.39%, respectively.

Considering that part of the positive impact of tax exemptions will be reversed in 2023, projections for the IPCA tend to be above the ceiling of the target next year, when the objective to be pursued by the BC is 3.25%, with a tolerance interval of 1.5 percentage points up or down.

Ana Madeira, chief economist for Brazil at HSBC, points out that the fiscal concern puts an extra on the bill. “We know how difficult it is to reverse this type of measure. Our perception is that the more you spend, even if temporarily, investors end up putting a little more risk premium,” she said.

HSBC awaits the materialization of the decisions to, if necessary, revise its estimates – it currently has an inflation projection of 8.3% for the end of this year and 4% for 2023.

In this context, he predicts that the BC will raise the Selic to 13.25% and close its cycle this week, although it leaves the door “ajar” for the August meeting, depending on the data.

The undocking of expectations for 2023 may lead Copom to reconsider its next steps, according to Madeira. “The Central Bank could review its flight plan in two ways: either by extending the Selic rate hikes or eventually leaving it higher for longer,” he said, without choosing a model as more likely.

A worsening in the balance of risks would require an even stronger dose of interest from the BC to bring inflation to the target within the relevant horizon. However, the monetary authority has already signaled more than once the desire to put an end to the tightening cycle, which began in March last year. Such a decision could be justified by the lagged effects of an already clearly restrictive monetary policy.

BTG Pactual, which also expects an increase of 0.5 percentage point in the Selic, awaits the communication from the BC to project a final adjustment of lesser or equal magnitude in August. According to economist Álvaro Frasson, the situation calls for caution.

“Recent inflation data, even though they have been decelerating, present a poor quality, with very high diffusion rates, cores well above the historical average. [pró-taxas mais baixas de juros] or closing the cycle”, he said.

Last Thursday (9), the IBGE (Brazilian Institute of Geography and Statistics) reported that the IPCA closed at 0.47% in May, reaching 11.73% in the 12-month period. Despite the index having come below market projections, eight of the nine groups of products and services surveyed had price increases in the month.

For BTG, the IPCA will end the year at 9.2%, with the possibility of a reduction of up to 2.9 percentage points with the approval of the fuel plan. For 2023, it estimates that part of this impact will be reversed, adding 0.9 percentage point to the inflation account, estimated so far at 4.3%.

In the external scenario, fears of a strong increase in interest rates in the United States to contain the advance of inflation and oil prices still very pressured add uncertainty to the discussions.

In agreement with the market, Goldman Sachs sees as the most likely scenario the increase in the Selic to 13.25% per year. But it does not rule out the possibility that the Copom may surprise with a higher increase than the 0.5% expected by the market and opt for an increase of 0.75 percentage point combined with the end of the cycle this week.