BC should leave door open after new interest rate hike, say economists

The Central Bank should leave the door open for a new interest rate hike after delivering this Wednesday (3) a 0.5 percentage point hike in the basic rate, taking the Selic to 13.75% per year. This is the majority expectation of the market, even among economists who are betting on the end of the monetary tightening cycle.

Among the factors that may make the Copom (Monetary Policy Committee) opt for an additional dose of interest in September, analysts cite the deterioration of inflation expectations for 2023 – projected at 5.33% in the median of the latest Focus survey, as well above the 4.75% ceiling.

“The most likely scenario is for the cycle to end at 13.75%, but we understand that the committee should not close the door on a possible rise at the September meeting. An additional adjustment may be implemented depending on the scenario of inflation expectations “, said Fernando Gonçalves, economic research superintendent at Itaú Unibanco.

For the economist, there is greater uncertainty than usual regarding inflation projections for both this year and next, given the difficulty in estimating the magnitude of the impact of the 17% to 18% ICMS ceiling on fuels, electricity and other essential items.

Gonçalves believes that the tax issue will be predominant in the new BC projections. “In the benchmark scenario, we think that inflation will fall from 8.8% to 7% in 2022. It is a very relevant decline, very much linked to the tax issue. Next year, we expect a rise of 4% to 4.3% in the committee’s projections”, he said.

The maintenance of the strong pace of economic activity and the increase in the perception of fiscal risk with the approval of the package of measures that expands social benefits on the eve of the elections are other elements pointed out by members of the financial market for the Selic to continue advancing.

This scenario led Santander, which until then had been betting on the end of the cycle, to revise its estimates and raise its forecast for the Selic rate at the end of 2022 from 13.5% to 14.25%.

“It is too early for the Central Bank to end the cycle in view of this deterioration in the base scenario, but also in the balance of risks”, said Maurício Oreng, superintendent of macroeconomic research at Santander.

“There is a tendency for the risk balance to become asymmetrical with an upward bias [cenário com expectativa de mais inflação]. These factors may lead the Copom to score 0.5 points and end up with an increase of equal or lesser magnitude, of 0.5 or 0.25 at the next meeting,” he added.

Gustavo Arruda, head of economic research for Latin America at BNP Paribas, points out that, in previous periods, a very expansionist fiscal policy was decisive for the BC to justify higher interest rates in the country.

“It seems unlikely to me that the Central Bank will be able to announce the end of the high cycle at this meeting. It is a risk that is not worth taking,” he said.

For the economist, the BC will have to “continue talking and acting”. Since March, BNP Paribas has been projecting the Selic at 14.25% by the end of 2022. At the time, it was one of the highest forecasts among major financial institutions.

“In our perception, inflation was a bigger problem than people imagined, we had a scenario of 10% inflation, which will not only be 10% due to the tax cut, it will be around 8%”, he said. .

To reach the estimated level, Arruda draws two scenarios. In the main, the BC should promote two consecutive increases of 0.5 percentage point. “I would prefer to see that 14.25% arriving as soon as possible because of inflation expectations,” he said.

In the alternative, the committee would raise 0.5 percentage point this Wednesday and slow down the pace with two more increases of 0.25 in the next meetings, advancing during the election period.

“Will the Central Bank feel independent enough to continue acting during the electoral campaign? I think it’s okay, even more so now that the BC is, in fact, independent by law. It’s even more important to do whatever is necessary.” regardless of the electoral process,” he continued.

For Insper economics professor, Juliana Inhasz, a final adjustment would signal the BC’s “vigilance” with a firmer monetary policy. Between the strategy of granting a single increase of 0.5 percentage point or the one of two consecutive increases of 0.25, she chooses the first option due to the electoral calendar.

“There’s a meeting in September, very close to the election. Politically, it doesn’t seem very attractive to have this gradualism for a small increase compared to all the increases we’ve had. said.

Despite waiting for the end of the monetary tightening cycle, the economist sees that the BC will not be categorical about the decision to have room for maneuver in the event of new turmoil, such as unexpected inflationary shocks arising from the War in Ukraine or new waves of Covid or other diseases such as monkeypox.

“The BC always leaves a nuance that the situation can change. I don’t think it will clearly declare that the cycle is over”, he said. “I think it’s going to be in the tone that it did what it was supposed to do and, from now on, it adjusts if the scenario changes.”

Rafaela Vitória, chief economist at Banco Inter, cites the deceleration of inflation of industrial goods, as well as the drop in commodity prices, as loopholes for the BC to find space to, finally, interrupt the escalation of the Selic.

Since May, the BC has signaled its intention to end the current interest rate shock, which is already the longest in the historical series and the strongest since the adoption of the inflation targeting regime in 1999.

“We are already in a scenario in which activity will decrease a lot from now on, with the global scenario also showing the same path. The impact of monetary policy may come at once and the Central Bank may want to be more cautious. caution means taking this last 0.5 point increase and stopping. Today, the scenario is more favorable for this stop”, he said.

The economist also highlights the high level of real interest. Waiting for the Copom and with the Federal Reserve (Fed, American central bank) on the radar, the average and long future interest rates ended this Tuesday’s trading session (2) with an upward bias, while the shorter interest rates retreated.​