Social spending and global slowdown reinforce BC caution on interest rates

Temporary policies to support income in the domestic scenario and a more accentuated deceleration of global activity in an environment of pressured inflation reinforce the caution of the Central Bank’s Copom (Monetary Policy Committee) on interest rates, according to minutes released this Tuesday (9).

“Prolonging such policies could raise country risk premiums and inflation expectations as they put pressure on aggregate demand and worsen the fiscal trajectory,” he said.

In the document, the collegiate highlighted that fiscal policy can affect inflation through several channels, including its effect on activity, asset prices and inflation expectations.

This Tuesday, the Jair Bolsonaro (PL) government started paying boosted social benefits to the population. In the race for the Plateau, both the current chief executive and former president Luiz Inácio Lula da Silva (PT) have already promised that, if elected, they will maintain Auxílio Brasil at R$600 in 2023.

Last Wednesday (3), the Copom repeated the dose of 0.5 percentage point, raising the Selic to 13.75% per year, and left the door open for a possible residual adjustment at the next meeting, in September. In the minutes, the committee repeated that it will assess the need for a new hike of lesser magnitude, that is, 0.25 point.

“Furthermore, given the persistence of recent shocks, the Committee will remain vigilant and assess whether only the prospect of maintaining the basic interest rate for a sufficiently long period will ensure such convergence,” he said.

Considering 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 BC also pointed out that it is still not possible to observe much of the expected contractionary effect on the economy by the “intense and timely” monetary tightening, as well as its reflection on current inflation. According to Copom, these impacts should be more evident in the activity indicators for the second half of the year.

“But the committee anticipates that measures to support aggregate demand, which will be implemented in the short term, should hinder a more accurate assessment of the stage of the economic cycle and the impacts of monetary policy”, he pondered.

The minutes highlighted the international scenario of economic slowdown, with the withdrawal of stimuli implemented throughout the pandemic and the action of central banks to curb the advance of global inflation. According to the monetary authority, points of attention regarding geopolitical issues remain.

“The war in Ukraine impacts on natural gas supplies, adding uncertainty to the European economic scenario, while the deterioration of the real estate sector, combined with the policy to combat Covid-19, negatively impact Chinese growth prospects”, he considered.

But the BC also indicated in the document that there is already an “incipient normalization” in supply chains and an “accommodation” in the prices of the main commodities.

“Allied to the rebuilding of inventories of industrialized products, these developments may imply a moderation in inflationary pressures linked to goods. On the other hand, the degree of idleness in the labor market in these economies suggests that inflationary pressures in the services sector may take time to dissipate.” , commented.

Since the first movement, when the Selic departed 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 longest in the historical series and the most intense since the adoption of the inflation targeting regime in 1999.

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