BC keeps interest rates and ends year with Selic at 13.75%

The Copom (Monetary Policy Committee) of the Central Bank kept the interest rate unchanged for the third consecutive meeting this Wednesday (7) and will end 2022 with the basic rate (Selic) at 13.75% per year.

In the communiqué, the BC collegiate warned of fiscal risks and repeated the warning that “it will not hesitate to resume the adjustment cycle if the disinflation process does not go as expected”, being able to adjust its future steps.

“The situation, particularly uncertain in the fiscal sphere, requires serenity in assessing risks. The committee will monitor with special attention future developments in fiscal policy and, in particular, its effects on asset prices and inflation expectations, with potential impacts on the dynamics of prospective inflation,” he said.

The monetary authority reinforced the message that it will remain vigilant, assessing whether the strategy of maintaining the basic interest rate for a “sufficiently prolonged” period will be able to ensure inflation control.

After being raised to 13.75% in August, the rate was maintained at that level in the September, October and December meetings. The monetary tightening cycle (selic rate hike) was interrupted after the Central Bank promoted the most aggressive interest rate shock since the adoption of the inflation targeting regime in 1999.

There were 12 consecutive increases, with an increase of 11.75 percentage points, in the period between March 2021, when the Selic left its historic floor (2%), and August of this year.

Copom’s decision was in line with the financial market’s consensual projection that the Selic rate would remain stable at 13.75%. A survey carried out by Bloomberg showed that this was the unanimous expectation among the economists consulted.

For next year, market distrust is growing in the face of a scenario of greater fiscal uncertainty. There is fear in relation to plans to increase public spending by the elected government of Luiz Inácio Lula da Silva (PT) and their effects on inflation. The lack of definition regarding the new fiscal framework also generates fear among investors.

In parallel to the Copom meeting, the PEC (proposed amendment to the Constitution) of the Transition is being discussed in Congress and should be voted on this Wednesday in the Senate plenary. The text approved by the CCJ (Commission for Constitution and Justice) on Tuesday (6) makes room for extra spending of R$ 168 billion – R$ 30 billion less than the proposal presented by the PT.

In light of additional government spending, analysts have revised their inflation estimates. According to Focus, the market projection for the IPCA (Broad National Consumer Price Index) rose to 5.92% in 2022.

In 12 months, the IPCA accumulated a rise of 6.47% until October, according to data from the IBGE (Brazilian Institute of Geography and Statistics). For this year, there is a consensus that inflation should exceed the target set by the CMN (National Monetary Council) at 3.5% —with flexibility of 1.5 percentage points for more or less.

For 2023, expectations reached 5.08% and are already above the maximum allowed in the tolerance interval (4.75%). The forecast for 2024 remains stable at 3.5% – above the center of the target (3%).

In the Copom reference scenario, inflation projections increased from 5.8% to 6% for this year and from 4.8% to 5% for 2023. For 2024, the collegiate raised the forecast from 2.9% to 3 %.

The Copom meets again on January 31st and February 1st, 2023 to calibrate the Selic level. Next year, the BC collegiate will have 2024 in its sights, considering the lag of the effects of monetary policy on the economy.