BC indicates ‘additional adjustments at a slower pace’ in interest rates

For the next meetings, the Central Bank’s Copom (Monetary Policy Committee) indicated that it will make “additional adjustments at a slower pace” in the basic interest rate (Selic), according to the minutes of the last meeting released this Tuesday (8).

“A further adjustment of 1.5 percentage points, followed by further adjustments at a slower pace at the next meetings, is the most appropriate strategy to achieve sufficient monetary tightening and ensure the convergence of inflation over the relevant horizon, as well as the anchoring of expectations. of longer terms”, detailed the monetary authority.

Last week, the Copom raised the basic interest rate by 1.5 percentage points, to 10.75% per year. As a result, Selic returned to double digits for the first time in almost five years, the last time being in July 2017.

The Selic rate is now at the highest level since May 2017, still in the government of Michel Temer (MDB), when interest rates were 11.25% per year.

The BC signaled that the monetary tightening cycle has not come to an end and indicated a reduction in the pace of basic interest rate adjustment as of the next meeting, scheduled for March 15th and 16th. But the pace of this deceleration remains open.

“The particularly high uncertainty about prices of important assets and commoditiesas well as the stage of the cycle, made the Committee consider it more appropriate, at this moment, not to signal the magnitude of its next adjustments”, explained the municipality, in the minutes.

The cycle of interest rate increases in Brazil —eight increases in a row, totaling 8.75%— will have the biggest increase since the introduction of the inflation targeting system in 1999. There were comparable increases only between 2002 and 2003 (8.5%, with a faster pace) and between 2013 and 2015 (7%). In March 2021, the Selic rate was at 2% per year, the lowest level ever.

The Copom minutes also pointed out that the Central Bank expressed concern about the adoption of fiscal policies aimed at controlling inflation in the short term, pointing out that the measures may generate an effect of high inflation.

“The Committee notes that even fiscal policies that have a downward effect on inflation in the short term can cause a deterioration in risk premiums, an increase in inflation expectations and, consequently, an upward effect on prospective inflation”, it indicated.

The unease of the monetary authority, which adopted a tougher tone after a post-decision statement read by most market participants as neutral to ‘dovish’ (softer), comes amid the discussion on the PEC of Fuels.

“Uncertainty regarding the future of the current fiscal framework results in an increase in risk premiums and increases the risk of de-anchoring inflation expectations”, says the minutes. “This implies assigning greater probability to alternative scenarios that consider higher neutral interest rates.”

“The document has a ‘hawkish’ tone (more rigid). The Central Bank seems to recognize the potential negative impact of initiatives related to tax exemptions, such as those related to fuel prices that have been discussed in recent weeks”, analyzed Caio Megale, chief economist at XP Investimentos.

Inflation expectations determined by the Focus survey for 2022 and 2023 were, in the week of the meeting, at 5.4% and 3.5%, respectively. Both were above the center of the targets for the periods, of 3.5% and 3.25%. This was the scenario used in the BC simulation.

The Focus survey is carried out by the monetary authority on a weekly basis. In it, the BC collects the projections of economists from financial institutions and analysis houses for the main indicators of the economy, such as inflation, GDP (Gross Domestic Product) and interest rates, for the next four years.

Copom’s inflation projections stand at 5.4% for 2022 and 3.2% for 2023. For this year, the Broad National Consumer Price Index (IPCA) is already higher than the maximum allowed in the tolerance range of 1.5 percentage point, which is 5%. This will represent, if confirmed, the breach of the inflation target for the second year in a row.

During the last meeting, the collegiate evaluated different adjustment rhythms and duration of the monetary tightening cycle in its simulations, as well as different terminal rates for the Selic.

“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 in contractionary territory. The Committee emphasizes that it will persevere in its strategy until consolidate not only the disinflation process but also the anchoring of expectations around your goals.”