The resurgence of geopolitical tensions due to the war in Ukraine may lead the Central Bank to extend the cycle of hikes in the basic interest rate, in addition to raising the Selic peak, to contain pressure on inflation. This is the view of several economists interviewed by the sheet.
The Monetary Policy Committee (Copom) meets on March 15th and 16th to calibrate the basic interest rate to control inflation. Currently, the Selic is at 10.75%.
“The risk of an extension of the Selic bull cycle increases as the notion that the escalation of the conflict will produce more persistent inflationary effects is perpetuated,” said Leonardo Porto, chief economist at Citi Brasil.
The bank remains with a projection of the Selic terminal rate at 12.75%, with the beginning of the downward cycle only in the second half of 2023.
Itaú Unibanco monitors the increase in uncertainty, especially regarding the dynamics of international commodity prices and market volatility, due to the unfolding of the conflict in Eastern Europe to revise (or not) its projection of the terminal interest rate, currently at 12 .50%.
“We were heading towards an end-of-cycle discussion in Brazil. Now, we have a series of scenarios ahead, with the possibility of other interest levels”, said Fernando Gonçalves, superintendent of economic research.
Roberto Padovani, chief economist at Banco BV, considers that the war has brought about a change in the level of inflation in the world and in Brazil and expects a Selic rate above 12.50%, his current projection. “We have a new inflationary shock, which implies more interest for longer to anchor expectations for next year,” he said.
The digital bank Modalmais decided to anticipate and revised its expectation of the terminal interest rate to 12.75%, compared to 12.25% in the previous projection. “I believe that the Central Bank is farther from the end of the cycle than we anticipated,” said chief strategist Felipe Sichel.
“The discussion about cuts in 2022 was no longer part of our scenario and now even less. The Selic will remain at this level [de 12,75%] until the end of the year”, he added.
Who has also discussed an increase in the Selic projection until the end of the year is Banco Original, which according to chief economist Marco Caruso, can jump from 12.25% “to something around 12.75% or 13%” .
However, the financial institution intends to wait for the next announcement from the BC to make any changes official.
Despite the new expectations regarding the Selic until December, experts are unanimous in saying that they expect the BC to maintain the flight plan for the next Copom meeting. The committee had already signaled a reduction in the pace of adjustment of the basic interest rate due to the lag in the effects of monetary policy.
Silvio Campos Neto, senior economist at Tendências Consultoria, also wants to wait for the signals issued after next week’s collegiate meeting to reassess the expected arrival level, currently at 12.25%. For him, the monetary authority should consider the increase in the price of commodities as “a focus of uncertainty and additional risk”.
The prices of several basic agricultural and metallic materials have soared along with the worsening of the crisis in Eastern Europe. Russia is a major producer of oil and natural gas and, together with Ukraine, has an important share in the global supply of corn and wheat – the grain that has soared the most so far, with an increase of almost 40% in the last 30 days.
Benchmark Brent crude surpassed US$100 (R$504.73) on February 24, for the first time since 2014. With new sanctions against Russia on the market’s radar, the barrel was trading at the highest levels since 2008. and reached the maximum of US$ 139.13 (R$ 706.11) on Sunday night in Brazil, with the reopening of markets in Asia.
“We still don’t have a very clear vision of how far this conflict is going and its potential consequences”, says the specialist from Tendências Consultoria. For Silvio Campos Neto, the monetary authority must show greater prudence in its speech in relation to the next steps.
Uncertainty and caution are keywords for the current economic scenario, in the opinion of Mirella Hirakawa, senior economist at AZ Quest Investimentos, who predicts a terminal Selic of 12.5% with an upward bias.
“The profile, so far, is of an inflationary shock. But the uncertainties of the magnitude and duration of the shock require caution”, he says. In her view, the autarchy needs to maintain a degree of freedom of maneuver in monetary policy.
Gonçalves, from Itaú Unibanco, predicts that the autarchy will leave its next moves open, conditioning its steps to the materialization of possible scenarios as a result of the invasion of Ukraine by Russia.
A view that is also shared by Caruso, from Banco Original. But the chief economist points out that the BC “cannot avoid attacking the inflationary shock, because the country is already starting from high inflation”.
The IPCA (Broad Consumer Price Index) closed 2021 at 10.06%, the highest since 2015. As a result, the index easily exceeded the target pursued by the BC (Central Bank), which was 3 .75% last year, with a tolerance of 1.5 percentage points up or down.
In February, inflation measured by the IPCA-15 (National Index of Consumer Prices Extended 15) rose 0.99%, according to the IBGE (Brazilian Institute of Geography and Statistics). Pressured by expenses with education, food and transport, the indicator for inflation was 10.76% in 12 months.
Amid the war in Ukraine and the government’s decision to lower the IPI (Tax on Industrialized Products) by 25%, the median calculated for the 2022 IPCA increased for the eighth consecutive week in the Focus survey, released by the BC on Monday (7), jumping from 5.60% to 5.65%.
The value is already above the ceiling of the 5% inflation target for 2022. The objective to be pursued by the monetary authority this year is 3.50%, with a tolerance of 1.5 percentage points more or less.
“This shock of wheat, corn and oil will hit the Brazilian economy in full. It is possible that we will discuss the IPCA between 6% and 7% at the end of this year and no longer between 5% and 6%. Central to position itself”, said Fernando Honorato Barbosa, chief economist at Bradesco, in a live last Friday (4).
For the specialist, the monetary authority must accommodate part of the inflationary shock and take the Selic to a level higher than the 12.25% expected by the bank. “It is possible that it goes to 12.50% -12.75% or a little more in this process”, he projected.
The bank BTG Pactual is also analyzing the possibility of raising its projections for the Selic to a level between 12.50% and 12.75% – currently, the expectation is 12.25%.
And it predicts a more contractionary outlook. “If the effect is short-term on expectations for 2022, there would be no reason to lengthen the cycle, but there would be reasons to make the next decisions stronger,” said economist Álvaro Frasson.
Given the stress of expectations, the expert believes that the municipality may announce a 1.25% increase in the Selic rate at the next Copom meeting if it wants to adopt a more “hawkish” stance, a term referring to a contractionary policy of high interest rates.
Citi Brasil also forecasts a 1.25 percentage point increase in interest rates at this month’s meeting. “We are even more comfortable with the scenario that the Copom will raise the Selic rate beyond 1% at the meeting on March 16”, stated Porto.
The other financial market analysts interviewed by sheet, in turn, expect the BC collegiate to deliver a 1% increase at the next meeting. In February, the monetary authority raised the basic interest rate by 1.5 percentage points, reaching 10.75% per year.
Economists point out that an increase of 1 percentage point is not a mild increase, on the contrary, and put the country at an advanced stage in the cycle of monetary tightening.
The increase in interest rates in Brazil is the largest among the main economies around the world, with eight consecutive increases, totaling 8.75 percentage points. In March of last year, the basic rate was at 2% per year, the lowest level ever.
The size of each of the next moves will largely depend on the interest rate that the Copom targets until the end of the monetary tightening cycle.
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