BC indicates targeting 2023 inflation despite pressure on prices in the election period

The Monetary Policy Committee (Copom) of the Central Bank signaled, on Wednesday (2), the deceleration of the pace of increase in the Selic, the basic interest rate, at the next meeting, on March 15th and 16th. While experts wonder about the cadence of this movement, the monetary authority indicates that it is fighting for the 2023 inflation target.

Last week’s decision reinforces the independence of the municipality, but it could have an effect on the political scenario and on the reelection plans of President Jair Bolsonaro (PL), according to economic analysts.

“The Central Bank will be focused on the technical mission of seeking to deliver a convergence of inflation expectations to the target within a reasonable horizon, even with possible consequences on economic activity and possible political consequences”, said Fernando Gonçalves, superintendent of Economic Research at Itaú Unibanco.

“One thing that draws attention is that the Central Bank talks about the next steps, in the plural, of reducing the pace of the Selic rate. Does this plural mean that it will still make more than one increase?”, asks Gonçalves,

Itaú works with the base scenario of another one percentage point increase in March, without ruling out a final smaller movement in May.

“We are refining the scenario depending on the next communications. We await more details, which should appear in the Copom minutes, next Tuesday (8),” he said.

The tone used by the BC was considered “dovish” — milder — by analysts, including Étore Sanchez, chief economist at Ativa Investimentos, who points out that inflation expectations are under pressure.

On Monday (31), according to the Focus report, financial market economists raised the inflation estimate for this year for the third week in a row, from 5.15% to 5.38%. Number above the 2022 target ceiling of 5%.

While the BC looks to 2023, the government already fears a spike in inflation in the third quarter of this year, at the height of the election campaign. This concern triggered the decision of President Jair Bolsonaro (PL) to sponsor the PEC (proposed amendment to the Constitution) that will allow reducing taxes on fuel.

Even in the economic team, which tends to act more on the defensive when it comes to giving up revenues or increasing expenses, the feeling is that it is not possible to “cross your arms” in the face of this situation.

“The Central Bank does not have to be guided by this and has to act independently of the political cycle. Its objective is to bring inflation down, which, consequently, brings popularity to the government”, says Caio Megale, chief economist of XP Investimentos.

“The goals are matched over time, but in the short term, sometimes you have to take a bitter medicine. The decisions of the monetary authority are purely technical.”

José Júlio Senna, former director of the BC, prefers to analyze the scenario based on the Brazilian real interest rate projected for the end of 2022, which currently stands at around 6.5%.

For the specialist, the number, although high, is already an achievement, since the IPCA closed 2021 with a high of 10.06%. In January, the IPCA-15 changed by 0.58%. With the entry of the new data, the preview of inflation accumulated a high of 10.20% in 12 months.

But the head of the Center for Monetary Studies at FGV/Ibre points out that this estimate is not yet fully assured, and may be affected by items that have affected inflation in the last year. This is the case of the fluctuation in fuel prices —due to the exchange rate and the price of commoditiesespecially oil—, industrialized products —affected by problems in the production chains during the pandemic— and primary products —subject to climatic variations.

“Inflation is more boring than I thought it would come, and oil has gone up again. I adjusted my interest rate expectations”, said Megale. “I expected that the Central Bank would slow down to 0.75 percentage point and, now, I think it will slow down to 1 percentage point”, he projected.

In addition to the evolution of inflation, Alberto Ramos, director of the macroeconomic research group for Latin America at Goldman Sachs, also puts the balance of risks and the international scenario into the equation, with the Fed (Federal Reserve, the American central bank) and other banks central banks signaling interest rate hikes and “adopting a slightly more ‘hawkish’ tune [agressiva] and restrictive”.

And the specialist goes further: “The political noise and recurrent institutional friction that we have seen in Brazil in recent years have led to a de-anchoring of the exchange rate, feeding back inflationary pressure. little better”.

This more coordinated global movement against inflationary pressures can, according to the chief economist at XP Investimentos, help the Brazilian scenario.

For him, the Central Bank is right to calibrate the step towards the end of the interest rate increase cycle in Brazil, after eight consecutive increases, totaling 8.75 percentage points. In March last year, the base rate was 2%.

The autarchy is now awaiting the results of the contractionary monetary policy in recent months, considering the lag between the interest rate hike and its effects on the economy. An end to the gentle monetary tightening cycle is also expected by José Márcio Camargo, chief economist at Genial Investimentos, “so as not to generate too much noise and too much uncertainty.”

While some economists believe that the election period, in the second half of the year, may influence the beginning of the interest rate decline phase in Brazil, others discard this hypothesis. For Alberto Ramos, central banks tend to act more conservatively in this situation.

“Election campaigns are generally a noisy process, tend to generate volatility in financial markets, and in Brazil, it seems that a polarized election is coming,” he said.

Datafolha’s poll, carried out from December 13 to 16, showed that former president Luiz Inácio Lula da Silva (PT) would defeat all of his opponents in an eventual second round. Also according to the poll, his main rival in the first round is President Jair Bolsonaro (PL), with PT ahead of the incumbent of Planalto by 48% to 22%. In the runoff simulation, Lula beats Bolsonaro by 59% to 30%.

Megale, who worked in the team of Minister Paulo Guedes (Economy) as a director at the special secretariat of Finance, is another who believes that the BC will try to calibrate the pace of monetary policy adjustments until March, at the latest until May, to spend the second half of the year. without needing to raise or lower interest rates. But he considers that the municipality, which has autonomy guaranteed by Complementary Law 179/2021, will not fail to act if necessary.

In Senna’s assessment, the BC realizes that an effort to anchor expectations still in 2022 represents a very high cost for economic activity, choosing to take it further. For 2023, the expectation for inflation so far is 3.5%, slightly above the target (3.25%).

This scenario forces the monetary authority to continue showing toughness in the fight against inflation, which can be costly for society, especially for the pockets of wage earners and people from lower income classes. In January, savings recorded the largest outflow of resources in the BC’s historical series, which began in January 1995. Withdrawals from bankbooks exceeded deposits by R$ 19.665 billion.

On Friday (4), BC President Roberto Campos Neto attended a meeting with President Jair Bolsonaro to “deal with institutional matters”.

A scenario with high inflation and a very tight monetary policy is not a combination that people like. For 37% of Brazilians, the economy is the country’s main problem today. The data are from the Genial/Quaest electoral poll released in January. In this installment, concerns about unemployment, inflation and economic growth are included. In addition, 66% of respondents consider that Brazil’s economy has worsened in the last year.

“If you don’t raise interest rates, you will have more pressured inflation for longer. By raising interest rates, we want to control inflation so that later we can have lower interest rates and lower inflation. It’s not forever. like when you’re sick and need surgery, it’s not a nice thing, but it solves the problem”, compared Alberto Ramos, from Goldman Sachs.