BC raises Selic to 13.75% and assesses lower high at the next meeting

The Central Bank’s Copom (Monetary Policy Committee) raised the basic interest rate (Selic) this Wednesday (3) again by 0.5 percentage point, from 13.25% to 13.75% per year, in the tightening longest monetary period in the historical series.

The BC collegiate left the door open for a possible additional adjustment at the next meeting, in September. In the statement, the committee says it will assess the need for a new hike of a lower magnitude, namely 0.25 point.

“The Copom emphasizes that it will remain vigilant and that future monetary policy steps may be adjusted to ensure the convergence of inflation to its targets,” he said.

“It also notes that the uncertainty of the current situation, both domestic and global, combined with the advanced stage of the adjustment cycle and its accumulated impacts yet to be observed, demand additional caution in its performance”, he added.

With the 12th consecutive increase, the Selic rate reached the highest level since 2016. From October to November of that year, still during the Michel Temer government (MDB), the interest rate was fixed at 14% per year.

Since the first movement, when it started from its historic floor (2% per year) in March 2021, the tightening cycle has accumulated an increase of 11.75 percentage points.

The current interest rate shock is already the strongest since the adoption of the inflation targeting regime in 1999. At the time, the basic rate rose from 25% to 45% per year.

At this Wednesday’s meeting, the BC collegiate followed the plan signaled at the previous meeting and repeated the magnitude of the 0.5 point increase promoted in June, when it halved the interest rate adjustment dose after two consecutive hikes of 1 point. percentage.

To justify the move, the Copom cited the “uncertainty surrounding its scenarios and a balance of risks with even greater variance than usual for prospective inflation.”

The Copom’s decision was in line with the consensus projection of the financial market. A survey carried out by Bloomberg showed that the 0.5 percentage point increase in the Selic rate was practically unanimous among economists in the face of significant changes in the domestic environment.

For Andrea Damico, partner and chief economist at Armor Capital, the statement brought some more hawkish (harsh) parts before softening the tone when talking about the future of the monetary tightening cycle.

“He paints the most nebulous scenario, but when he says what he’s actually going to do, he puts it in the conditional and talks about residual and lower magnitude adjustment, he doesn’t even consider having another 0.5 increase. At the end of the story, I still think he stops “, said.

The expert points out that, at the next meeting, the BC collegiate must take into account the deceleration of inflation of industrial goods and a decompression in commodity prices to decree the end of the cycle of monetary tightening.

Marco Caruso, chief economist at Original, also sees between the lines that the BC should end the interest rate shock with the Selic at 13.75%. The main signal, according to him, is the projection of 2.7% for 2024 inflation, below the center of the target.

The analyst also points out that the Copom’s reference scenario makes room for imagining that the interest rate cut may happen sooner than the market is predicting.

“If he is correct in the inflation projections, especially for 2024, we can start to see interest cuts from the first to the second quarter of next year”, he said.

Roberto Padovani, chief economist at Banco BV, also commented that the BC’s strategy follows a scenario of better inflation than expected by the market in the coming years and highlights the weight that projections for 2024 are beginning to have in Copom’s decisions. “This would allow the BC a slower convergence of inflation,” he said.

Since the last Copom meeting, the government’s measures to lower fuel prices through tax cuts have materialized, with the enactment of the law that sets a ceiling of 17% or 18% for ICMS (Imposto sobre Circulação of Goods and Services) on fuel, electricity, transport and telecommunications.

As a result, the IPCA-15 (Extended National Consumer Price Index-15) decelerated strongly in July and reached the lowest change in two years, with the rate accumulated in 12 months standing at 11.39%. The number came in below 12%, but still well above the official inflation target for this year (3.5%) – already abandoned by the BC.

The IPCA for July will be released by the IBGE (Brazilian Institute of Geography and Statistics) next Tuesday (9).

Despite the estimated short-term relief from inflation, the perception of increased fiscal risks, after the approval of the constitutional amendment that expands social benefits and sustains economic activity, has put pressure on expectations for 2023.

Given that inflation projections for this year and next were subject to high impacts associated with tax changes, the collegiate highlighted a longer monetary horizon.

“The committee chose at this time to emphasize twelve-month inflation in the first quarter of 2024, which reflects the relevant horizon, smoothes the direct effects arising from tax changes, but incorporates their secondary impacts on inflation projections relevant to the decision. of monetary policy”, 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, uncertainty about the future of the country’s fiscal framework and additional fiscal stimuli that support aggregate demand, partially incorporated in inflation expectations and asset prices. .

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

“The committee considers that the possibility that fiscal measures to stimulate demand will become permanent accentuates the upside risks for the inflationary scenario. On the other hand, it notes that the increased risk of a slowdown in the global economy also accentuates the downside risks” , said.

In the external environment, the BC considered that the scenario remains “adverse” and volatile”, with “greater negative revisions to global growth in an inflationary environment still under pressure”. United States fuels worries about the risk of global recession.

According to the BC, the situation remains particularly uncertain and requires “serenity” in the assessment of risks.

Relevant horizon inflation projections have been deteriorating among market analysts. According to the Focus survey published last Monday (1st), estimates for 2022 and 2023 are at 7.15% and 5.33%, respectively, both above the ceiling of the goals pursued by the BC. For the 2024 IPCA, the market forecasts 3.30%.

In the Copom reference scenario, inflation projections fell from 8.8% to 6.8% this year and rose from 4% to 4.6% in 2023. For 2024, the collegiate maintained the forecast of 2.7% . In the analysis, the BC says that the estimates incorporate the impact of tax measures approved by Congress.

“For the horizon of six quarters ahead, which smoothes the calendar-year effect, but incorporates the secondary impacts of tax measures that apply between 2022 and the first quarter of 2023, the twelve-month accumulated inflation projection is set at 3 .5%”, he highlighted.

The BC scenario assumes an interest rate trajectory that ends 2022 at 13.75% per year, reduces to 11% in 2023 and 8% in 2024.

Given the lag in the effects of monetary policy on the economy, the collegiate made its decision on interest rates looking at the target for 2023 and, to a lesser extent, for 2024 – set by the CMN (National Monetary Council) at 3.25% and 3% , respectively, with a margin of tolerance of plus or minus 1.5 percentage points.

The Copom will meet again on September 20 and 21 to recalibrate the Selic.