BC keeps Selic at 13.75%, but warns of worsening inflation expectations

The Copom (Monetary Policy Committee) of the Central Bank maintained this Wednesday (1st) the basic interest rate (Selic) at 13.75% per year for the fourth consecutive meeting – the first since President Luiz Inácio Lula da Silva (PT) took office.

In the communiqué, the BC collegiate raised the tone and warned about fiscal uncertainties and the worsening of inflation expectations, which are moving away from the target in longer terms.

“The Committee reinforces that it will persevere until it consolidates not only the disinflation process but also the anchoring of expectations around its targets, which have shown deterioration in longer terms since the last meeting”, he said.

The decision was in line with the consensual projection of the financial market. A survey carried out by Bloomberg showed that this was the unanimous expectation among the analysts consulted.

The announcement takes place amidst an environment of high interest rates, uncertainties related to the fiscal issue and noise generated by speeches by Lula and the top echelon of the government – ​​uncomfortable with the high level of Selic and its negative effects on economic activity.

Economists’ concern stems from the possibility of reinstatement of federal taxes on fuels as of March and the design of the new fiscal rule that will replace the expenditure ceiling – a mechanism that limits the growth of public expenditures to the inflation registered in the previous year.

The approval of the PEC (proposed amendment to the Constitution) that authorized the increase in expenses this year is also pointed out by the market as a sign that the government may be predisposed to a more expansionist fiscal policy (more public spending, which puts pressure on inflation and threaten the balance of government accounts).

In the face of growing fears, inflation expectations both for this year and for longer terms have worsened since the previous meeting, in December 2022.

In the Copom’s reference scenario, inflation projections increased from 5% to 5.6%% for this year. For 2024, the board raised the forecast from 3% to 3.4%.

The collegiate also included an alternative scenario, in which the Selic is kept constant throughout the relevant horizon, with inflation projections of 5.5% for 2023, 3.1% for the third quarter of 2024 and 2.8% for 2024.

The BC also said that it will remain vigilant and assess whether the strategy of maintaining the basic interest rate for a longer period than in the reference scenario will be able to ensure the convergence of inflation.

“The committee emphasizes that future steps in monetary policy can be adjusted and will not hesitate to resume the adjustment cycle if the disinflation process does not go as expected,” he said.

The projected inflation for 2023 in the Focus bulletin last Monday (30) is 5.74%, almost one percentage point above the target ceiling to be pursued by the Central Bank (4.75%). This would represent overshooting the target for the third consecutive year.

For 2024, the most relevant period for the BC’s performance today, the expectation for the IPCA (National Broad Consumer Price Index) rose from 3.5% to 3.9% –already above the central target (3%).

Pressured, the BC still does not show signs of when it intends to start monetary easing with a Selic cut. With 2024 in sight, the board will meet again on March 21st and 22nd to recalibrate the base rate level.

The cycle of interest rate hikes was interrupted in September 2022 by the Copom after the most aggressive shock since the adoption of the inflation targeting system in 1999.

There were 12 consecutive increases, with an increase of 11.75 percentage points, from March 2021, when the basic rate left its historic floor (2%), in August of last year.