BC raises the Selic by 0.5 point, to 13.25%, and indicates a new high in August

The Central Bank’s Copom (Monetary Policy Committee) raised this Wednesday (15) the basic interest rate (Selic) by 0.5 percentage point, from 12.75% to 13.25% per year, and indicated that the monetary tightening cycle has not ended.

In view of the current scenario and the risk of unanchoring expectations for longer terms, the BC collegiate signaled that the interest rate hike will extend to the next meeting, in August, when it predicts a new high of equal or lesser magnitude.

“The Committee emphasizes that it will persevere in its strategy until it consolidates not only the disinflation process but also the anchoring of expectations around its goals”, he said.

To justify the next move, he said: “The Committee notes that the growing uncertainty of the current situation, combined with the advanced stage of the adjustment cycle and its impacts yet to be observed, demand additional caution in its performance.”

The Selic reached the highest level in almost five and a half years. In January 2017, the interest rate was at 13.75% per year, during the government of Michel Temer (MDB).

The Copom started raising interest rates in March 2021, when the Selic departed from its historic low, at 2% per year. Brazil was one of the first countries among the main economies in the world to make this move.

Since the beginning of the monetary tightening cycle, more than a year ago, there have been 11 consecutive increases.

At this meeting, the BC collegiate maintained the plan signaled at the previous meeting, in May, that it would make a new adjustment of lesser magnitude after raising the interest rate by 1 percentage point. Between October 2021 and February this year, there were three increases of 1.5 percentage points.

The current interest rate shock, which since the first movement has accumulated an increase of 11.25 percentage points, is already the longest and strongest since the adoption of the inflation targeting regime, in 1999. At the time, the basic rate jumped from 25% to 45% per year.

This Wednesday’s Copom decision was in line with the financial market forecast. A survey carried out by Bloomberg showed that most analysts consulted expected an increase of 0.5 percentage point in the Selic.

With the base rate in double digits and in a very contractionary territory, the BC responds to persistent and widespread inflation and the deterioration of expectations for 2023.

Given the lag in the effects of monetary policy on the economy, the collegiate already makes its decision on interest rates looking fully at the inflation target for next year – set by the CMN (National Monetary Council) at 3.25%, with a tolerance margin of 1 .5 percentage point plus or minus.

“The Committee understands that this decision reflects the uncertainty surrounding its scenarios and a balance of risks with an even greater variance than usual for prospective inflation, and is compatible with the strategy of converging inflation around the target over of the relevant horizon, which includes the 2023 calendar year,” he said.

For Mauricio Oreng, macroeconomic research superintendent at Santander, the statement does not provide much clarity as to the entire BC flight plan and expects more details in the minutes, which will be released next Tuesday (21).

“There’s a subtlety that they talk about looking for inflation around the target, not the target, I can’t say if, in fact, it’s a signal or just a question of writing, but it seems to me that the BC may be preparing the ground for some smoothing of the interest rate trajectory, seeing an environment very difficult to reach the central target next year”, he commented.

In recent weeks, new perceptions of fiscal risk have entered the radar with government measures to lower fuel prices through tax cuts.

The theme was highlighted in the communiqué in more than one passage. “It was evaluated that the tax measures in progress significantly reduce inflation in the current year, although they raise, to a lesser extent, inflation in the relevant horizon of monetary policy”, said the BC.

The scenario also weighs heavily on oil prices, which are still heavily pressured, the uncertainties arising from the Ukrainian War and the lockdowns in China and the reaction of monetary authorities around the world, especially the Federal Reserve (Fed, central bank of the United States) and the ECB ( European Central Bank), in the face of inflationary surprises.

Also on Wednesday, the Fed confirmed a 0.75 percentage point increase in its interest rate. It is the biggest increase applied by the monetary authority of the United States since 1994, indicating a more aggressive posture of the agency in the face of the biggest inflation in the country in four decades.

In the external environment, the BC considered that the scenario continued to deteriorate, “marked by negative revisions to prospective global growth in an environment of strong and persistent inflationary pressures”.

The committee also said that inflation continued to surprise negatively, “both in more volatile components and in items associated with underlying inflation”.

Last Thursday (9), the IBGE (Brazilian Institute of Geography and Statistics) reported that the IPCA (Extended National Consumer Price Index) slowed to 0.47% in May. Even though the monthly result was below market expectations, 8 of the 9 groups of products and services surveyed had price increases. In the 12-month period, inflation reached 11.73%.

Due to the strike by BC civil servants, the Focus survey was not released on the eve of the Copom, but the collegiate had updated data on the estimate for inflation in this Wednesday’s decision – 8.5% for 2022 and 4.7% for 2023.

In the Copom reference scenario, inflation projections rose to 8.8% and 4% in 2022 and 2023, respectively. In the analysis, it chose to maintain the premise that the oil price follows approximately the future curve for the next six months, ending the year at US$ 110/barrel, and increasing 2% per year from January 2023.

“The reference scenario projections do not incorporate the impact of tax measures on fuel, electricity and telecommunications prices that are in progress. The Committee believes that the uncertainty surrounding its assumptions and projections is currently greater than usual and has grown since the last meeting” he said.

Fernando Fenolio, chief economist at WHG, points out that the statement showed a more uncertain international and local economic environment, with emphasis on fiscal policy, requiring more caution on the part of the monetary authority.

“He puts [a política de subsídio ao preço dos combustíveis] as a risk, it gives the impression that inflation will be lower this year due to the mechanical reduction of the tax, but for the next year you can have the opposite effect of more inflation or make convergence difficult due to the demand issue a little stronger in demand of other goods,” he said.

The BC assessed that risk factors for inflation remain in both directions.

Among the conditions that would push prices up, he highlighted “a greater persistence of global inflationary pressures, and the uncertainty about the future of the country’s fiscal framework and fiscal policies that imply support of aggregate demand, partially incorporated in inflation expectations and prices asset”.

In the opposite direction, he highlighted “a possible reversal, albeit partial, of the increase in international commodity prices in local currency, and a more accentuated deceleration of economic activity than projected”.

The expectation of economists puts inflation further and further away from the ceiling of the objective pursued by the BC this year, of 5%. The monetary authority has already admitted that, in 2022, the target should be exceeded for the second year in a row. In 2021, the IPCA reached 10.06%. The forecast for next year is above the target center but still within the tolerance range (up to 4.75%).

The Copom will meet again on August 2nd and 3rd to recalibrate the Selic.