BC can repeat Selic high of 1.5 points, say former directors

Although the Selic, the Monetary Policy Committee (Copom) of the Central Bank, signaled at its last meeting the deceleration of the pace of adjustment of the basic interest rate, this week the same magnitude of increase practiced in the last meetings, from 1, 5 percentage point, according to former BC directors Tony Volpon and Alexandre Schwartsman.

Inflation, pressured mainly by rising fuel prices, and the global turmoil resulting from the war between Russia and Ukraine weigh in on the decision.

The Copom meets as of this Tuesday (15) to calibrate the basic interest rate. Currently, the Selic is at 10.75% per year. Given the lag in the effects of monetary policy, the next meeting is the last in which calendar year 2022 continues to be contemplated on the relevant horizon.

“Several houses are starting to raise their inflation forecasts for this year and also for 2023, which is the year in which the Central Bank would like to see inflation return to close to the target. comply with what was signaled and, in fact, increase 1.5 percentage points”, said Volpon.

The median of inflation projected by financial market analysts for 2022 rose from 5.65% to 6.45%, according to the Focus survey released this Monday (14), moving further away from the target ceiling. If the estimate is confirmed, it will represent the overflow of the target for the second consecutive year.

The objective to be pursued by the monetary authority this year is 3.5%, with a tolerance of 1.5 percentage points up or down.

For 2023, the median of projections went from 3.51% to 3.70%. The center of the target for the next year is 3.25%.

For Volpon, who is chief strategist at WHG (Wealth High Governance), the collegiate’s discussion about a possible further boost in the basic interest rate will go through the inflationary shock caused by the invasion of Ukraine by Russia, as well as the 1.01 increase. % of the IPCA (Extended National Consumer Price Index) in February, a figure above the expectations of the financial market, which had expected an increase of 0.95%. In the 12-month period, the inflation indicator reached 10.54%.

Schwartsman also considers that new inflationary shocks may lead the BC to reassess its flight plan to ensure that expectations for next year remain anchored after a “7 to 1” in 2022.

“I would look very carefully at whether or not it makes sense to decelerate the pace of monetary tightening, because there has been a considerable and unexpected worsening of the inflationary environment with the issue of war and fuel prices,” he said.

Agricultural commodity and oil prices have soared along with the worsening crisis in Eastern Europe. Brent oil, used as a reference, surpassed US$ 100 (R$ 504.73) on February 24, for the first time since 2014. A week ago, the barrel was trading at the highest levels since 2008 and reached the maximum of US$ 139.13 (R$ 706.11) — values ​​have retreated a little in recent days.

In the wake of the rise in oil prices on the international market, Petrobras announced, last week, a mega-increase in fuel prices. In the case of gasoline, the increase for distributors was 18.8%. For diesel, the increase was even greater, 24.9%.

The readjustments were announced in the midst of a debate in the government and in Congress about the state-owned fuel price policy.

On Friday (11), President Jair Bolsonaro (PL) fully sanctioned the bill that amends the collection of ICMS (Tax on the Circulation of Goods and Services) on fuels and resets the PIS/Cofins rates on diesel and gas. until the end of 2022 (waiver of R$ 18 billion).

If the war continues, Minister Paulo Guedes (Economy) admitted that subsidies from the National Treasury can be adopted for diesel.

“Diesel has a very small direct weight in the IPCA calculation, of 0.2%. Subsidizing diesel is an exchange of political support. In practice, it is more to appease a possible base of political support for the president [Jair Bolsonaro]who rode the wave of the 2018 truckers’ strike,” Schwartsman said.

The uncertainty about the duration of the conflict is a factor to be considered by the monetary authority at the next Copom meeting, in the opinion of José Júlio Senna, former director of the BC.

“Brazil’s inflationary picture was already worrying and has become even more so. In my view, the impact of this conflict on inflation will be much more significant than the impact on economic activity,” he said.

Even so, he believes that the collegiate will avoid repeating the pace of adjustment of 1.5 percentage points, taking into account the high real interest rate in Brazil and the advanced stage of the monetary tightening cycle.

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 in history, and five months later it was already in contractionary territory (which puts a brake on economic activity and inflation).

“Being more aggressive may not be right now because monetary policy has not yet produced its full effects, and the real interest rate that we have already reached is very high, we are talking about almost 8% a year,” he said.

Based on the 360-day swap contract and one-year inflation expectations extracted from the Focus survey, real interest rates reached around 7.5% a year in March, the highest level since August 2016.

At this week’s meeting, Senna expects the Copom to deliver a 1 percentage point increase in the basic rate and sustain the high interest rate for longer. His vision is in line with market expectations. This week, most of the assessments are that the Selic rate will reach 11.75% per year (up 1 percentage point).

Such as sheet showed, several Brazilian economists believe that the resurgence of geopolitical tensions due to the war in Ukraine could lead the BC to extend the cycle of hikes in the basic interest rate to contain pressure on inflation.