Economy

BC should stop interest rate hikes, but could make a symbolic increase, say analysts

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The longest and most intense cycle of monetary tightening promoted by the Central Bank should be interrupted this Wednesday (21). This is the majority expectation of the financial market, which expects the maintenance of the basic interest rate (Selic) at 13.75% per year.

But a final adjustment of 0.25 percentage point, which would send a tougher message from the monetary authority, is not ruled out by economists.

“Copom’s communication at the last meeting was in the direction of stopping. If he was comfortable signaling the pause back there, from there to here, the comfort [que possibilitou a sinalização] was at least the same. So, he pauses for evaluation,” said Caio Megale, chief economist at XP Investimentos.

The comfort, in the view of the former special advisor to the Ministry of Economy, comes from the drop in inflation projections for this year and especially for the next – the most relevant period for the BC’s performance given the lag in monetary policy.

According to the Focus bulletin, released this Monday (19), the market estimate for the 2022 IPCA (Broad Consumer Price Index) dropped for the 12th consecutive week, from 6.4% to 6%, and the projection for 2023 fell from 5.17% to 5.01% – the fifth consecutive drop.

The lowest forecast for 2022 incorporates the impact of approved legislative measures regarding fuel and electricity prices. After the reduction of ICMS rates, the country registered two months of deflation (in July and August).

Just last month, the country’s official inflation index dropped 0.36%, according to data released by the IBGE (Brazilian Institute of Geography and Statistics). In the accumulated in 12 months, the IPCA was 8.73%.

In addition to the tax cut, Megale also mentions the fuel price readjustments announced by Petrobras in the wake of the fall in the value of oil and food inflation with a “slightly more favorable” dynamic.

For 2023, economist Heron do Carmo, a professor at FEA-USP (Faculty of Economics and Administration at the University of São Paulo), expects a more controlled behavior of inflation. Among the reasons, he cites that the effects of recent inflationary shocks – caused by the Ukrainian War – tend to wear off.

The inflation specialist says he sees no justification for a further increase in interest rates and considers that the BC has already placed the Selic at a “very reasonable” level.

“We already have an interest rate that should reach almost 6% in real terms now at the end of the month, when the September inflation result comes out, I don’t see any reason for a new interest rate increase”, he said.

The electoral cycle is another factor that can influence the BC’s decision on interest rates, according to Carmo, and put the monetary authority’s autonomy to the test. The Copom will define the course of the basic rate amid the final stretch of President Jair Bolsonaro’s (PL) campaign for a second term.

The BC autonomy law, in force since February 2021, determines fixed four-year terms for the president and directors of the municipality, which can be renewed only once and do not coincide with that of the president of the Republic.

If the BC does not end the cycle of interest rate hikes this week, it will be the first time that the Copom raises the Selic rate on the eve of the first round.

The last move in the middle of the electoral period took place in 2002, when the committee decided in an extraordinary meeting between the first and second rounds to raise the base rate by 3 percentage points, from 18% to 21% per year.

“The Central Bank will always say that [a eleição] no [influencia], but any sensible person knows that it is. It would be a surprise to see a change in interest for this reason, unless the interest rate was very lagged, but that is not the case”, said the USP professor.

Megale, on the other hand, sees a marginal influence of the electoral period on the decision of the collegiate. “The ideal is not to throw even more volatility into a topic that is already volatile, but if it is necessary to do [ajuste]is not a restriction,” he said.

For the chief economist at XP, there is a chance that the BC will take the Selic to the level of 14% per year, despite not being its main scenario, if it wants to adopt a more incisive stance.

Ana Madeira, chief economist for Brazil at HSBC, believes that a residual adjustment of 0.25 percentage point would help reinforce the monetary authority’s “hawkish” tone. “At the end of the day, we still have an election in the middle and fiscal risk for next year,” she argued.

The government presented the proposed Budget for 2023 with an average value of R$405 for Auxílio Brasil, despite the promise of maintaining the boosted benefit of R$600.

The specialist also points out that, although inflation projections are falling for next year, they are still above the objective to be pursued by the BC in 2023, of 3.25%, with a tolerance of 1.5 percentage points for more or more. for less.

For Rafael Castilho, economist at Credit Suisse, a final move by the BC would be “more prudent” and would signal the monetary authority’s commitment to fighting inflation in the face of deteriorating expectations for 2024.

According to the latest Focus bulletin, economists’ projection for 2024 rose to 3.5% – above the center of the target, set at 3% by the CMN (National Monetary Council).

Economists also highlight the acceleration of economic activity at a stronger pace than expected. The GDP (Gross Domestic Product) grew 1.2% in the second quarter, mainly impacted by the services sector.

“The job market is also strong, with the participation rate increasing, as well as unemployment falling. This all puts pressure on the demand side,” said Castilho. In Brazil, the unemployment rate dropped to 9.1% in the quarter ended in July this year.

This set of factors makes analysts see room for the BC to recalibrate the Selic, even though they recognize that they would not be surprised if the monetary authority decides to end the cycle of monetary tightening with the Selic at 13.75% per year.

“Is an additional 0.25 going to make a very large quantitative change? It won’t. However, we see this additional having a low cost for the Central Bank”, summarized Madeira.

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