BC raises the Selic again by 1.5 point, at 9.25% per year

As indicated in the previous meeting, the Central Bank’s Copom (Monetary Policy Committee) raised the basic rate (Selic) again by 1.5 percentage points, to 9.25% per year, this Wednesday (8).

In the statement, the BC indicated a new high of the same magnitude for its next meeting, in February, to 10.75% per year.

The rate is the highest in four years, when it reached 9.25% in July 2017, still in the government of Michel Temer (MDB).

In the previous meeting, in October, the BC also raised the rate by 1.5 percentage points and indicated that it would make another increase of the same magnitude afterwards.

The decision came in line with market projections. A survey carried out by Bloomberg showed that all analysts consulted expected a 1.5-point rise in the Selic.

According to this week’s Focus report, in which the BC releases market projections, economists expect interest rates to close in 2022 at 11.25% per year.​

“The Copom emphasizes that the future steps of monetary policy can be adjusted to ensure the convergence of inflation to its targets, and will depend on the evolution of economic activity, the balance of risks and inflation projections and expectations for the relevant monetary policy horizon “, punctuated the text of the monetary authority.

With the Selic rate above 8.5% per year, the calculation of savings income changes and becomes 0.5% per month plus the TR (Referential Rate) for all booklets.

The Referential Rate, which was zeroed, goes up again with the new Selic, which also impacts the correction of the FGTS (Guarantee Fund for Time of Service) and real estate financing linked to the rate.

The current cycle of hikes in the basic rate is the most aggressive since 2002, with sudden increases, and it is the one that will have the greatest difference between the initial and the final rate since the creation of the inflation targeting system, in 1999.

The interest rate shock is a response by the BC to the price hike observed since the end of last year and to successive upward revisions of inflation expectations for the next year.

Despite not having accelerated the pace, the statement brought a harsher tone regarding the monetary tightening. The Copom admitted for the first time that expectations are discouraging and indicated that it will continue to raise interest rates not only until inflation slows down, but also that market projections for the coming years are around the target.

The BC reinforced that the Selic should reach a “significantly contractionary” level. That is, well above neutral interest (which neither heats up nor contracts the economy).

“The Copom considers that, given the increase in its projections and the risk of unanchoring expectations for longer terms, it is appropriate for the monetary tightening cycle to advance significantly into contractionary territory. The committee will persevere in its strategy until it consolidates. only the disinflation process as well as the anchoring of expectations around its goals”, he pointed out.

For this year, there is a consensus in the market and in BC that inflation should exceed the target set by the CMN (National Monetary Council) at 3.75% — with 1.5 percentage points of tolerance for up and down.

Estimates grow from week to week.

According to Focus, the indicator should be at 10.18% in 2021, 4.93 percentage points above the maximum allowed. A month ago, the projection was 9.33%.

In the relevant horizon — for when the BC understands that the monetary policy takes effect — inflation expectations have been growing. For 2022 and 2023, the projections are at 5.02% and 3.50%, respectively, both above the target center for the periods, of 3.5% and 3.25%.

For next year, the number is already above the maximum allowed in the tolerance range, which is 5%.

BC’s projections for inflation are 10.2% for 2021, 4.7% for 2022 and 3.2% for 2023. .65.

The market expects the Selic to advance to 11.75% throughout 2022 and then start a downward cycle, with 11.25% until December and 8% at the end of 2023 — in addition to the confirmed 9.25% for this year.

“In this scenario, projections for regulated price inflation are 16.7% for 2021, 3.8% for 2022 and 5.2% for 2023. The ‘water scarcity’ tariff flag is adopted in December 2021 and hypothesis of a ‘red level 2’ tariff flag in December 2022 and December 2023”, stated the text, in relation to measures that impact the energy bill to mitigate the effects of the water crisis.

Despite having decided not to accelerate the pace of monetary tightening, the BC kept its focus on inflation in 2022 and 2023. Some economists evaluated that, in order to reach the target for next year, the Copom would have to raise interest rates more quickly.

In the statement, the Copom affirms that its decision reflects its basic scenario “and a balance of risks of variance greater than usual for prospective inflation and is compatible with the convergence of inflation to the targets over the relevant horizon, which includes the calendar years 2022 and 2023”.

The escalation of prices in the country began at the end of last year due to a series of shocks, such as change in demand for food in the pandemic, problems in crops with rain and frost, rise in commodity prices accompanied by devaluation of the real, and now the water crisis, which made the Brazilian electricity bill more expensive.

The scenario was aggravated by the market’s perception of a worsening in the fiscal regime, when the government can be negligent with public accounts.

Regarding the fiscal risk, the BC emphasized recent better data, but considered that questions regarding the fiscal framework “increase the risk of discouraging inflation expectations, maintaining the upward asymmetry in the balance of risks”.

For the monetary authority, this leads to a higher probability of inflation above that projected in its basic scenario.

The chief economist of Banco Ourinvest, Fernanda Consorte, pointed out that although the inflationary scenario is still worrying, the recent and consecutive downward revisions of economic growth projections for next year led the BC not to accelerate the rate of interest rate hikes. .

“However, the statement emphasized the alert tone, especially with regard to the fiscal scenario and possible impacts that a lack of control in spending could have on inflation. In other words, it follows the message that the BC will do everything possible, with more increase interest rates ahead, to contain any more significant advance in inflation,” he said.

For Consort, there is room for the Selic to reach 12% next year.

The chief economist of Ativa Investimentos, Étore Sanchez, said the statement came in a “hawksh” tone.

“It couldn’t be different from the authority’s conditional inflation expectations,” he pointed out. For him, the Selic should reach a peak of 12.25% throughout 2022.

Hawk means falcon in English and is a jargon used among economists to point out the BC’s contractionary stance, more aggressive and with a tendency to raise interest rates. On the contrary, when it is considered a dove, pigeon in English, the monetary authority adopts a softer and more expansionist speech, with the intention of cutting interest rates or raising less.

Paloma Brum, investment analyst at Toro, also saw a harsher tone in the statement regarding inflation expectations.

“The BC leaders endorsed that they are committed to maintaining a contractionary monetary policy, not only with the aim of controlling inflation, but also until inflation expectations are re-anchored,” he analyzed.

The founding partner of the analysis house Nord Research, Marilia Fontes, recognizes that inflation expectations are daunting.

“In the previous statement, the Copom said that ‘at this moment’ it was appropriate to move into significantly contractionary territory, which gives the idea that it is temporary and without conviction. The term was withdrawn and the tone became more austere”, he assessed.

Inflation control is the main attribution of the monetary authority. For this, the BC sets the target of the basic interest rate.​

When inflation is high, the Copom raises interest rates in order to reduce the stimulus to economic activity, which reduces consumption and balances prices. Otherwise, the BC may reduce interest rates to stimulate the economy.

The statement also highlighted that consumer inflation remains high. “The rise in prices was higher than expected, both in the more volatile components as well as in items associated with underlying inflation,” he said.

The committee reiterated that, in its baseline scenario for inflation, both up and down risk factors remain.

“On the one hand, a possible reversal, albeit partial, of the increase in international commodity prices in local currency would produce an inflation trajectory below the baseline scenario,” he pointed out.

“On the other hand, further extensions of fiscal policies to respond to the pandemic that put pressure on aggregate demand and worsen the fiscal trajectory could raise the country’s risk premiums,” he added.

Regarding economic activity, the BC said that indicators released since the last meeting again show an evolution “moderately below expectations”.

In the external scenario, according to the statement, the environment has become less favorable for emerging economies.

“Some central banks in major economies have clearly expressed the need to be cautious in the face of more persistent inflation, making financial conditions more challenging for emerging economies,” he said.

In addition, BC highlighted the possibility of a new wave of Covid-19 during the winter and the emergence of the omicron variant, which add uncertainty about the pace of recovery in central economies.