BC raises Selic by 1 point, to 11.75%, highest level in 5 years

The Central Bank’s Copom (Monetary Policy Committee) maintained its plan to reduce the pace of monetary tightening and raised the basic interest rate (Selic) by 1 percentage point, from 10.75% to 11.75% per year, this Wednesday (16).

The collegiate also signaled that the cycle of monetary tightening, which began in March last year, has not come to an end and will continue to advance significantly in “even more contractionary” territory, in the face of new inflationary shocks.

Regarding its next steps, the BC anticipated that it should make another adjustment of the same magnitude, that is, a new increase of 1 percentage point at the next meeting.

The decision came in line with financial market projections. A survey carried out by Bloomberg showed that most analysts consulted expected an increase of 1 point in the Selic, even with the deterioration in inflation expectations.

The BC collegiate met this week amid a challenging scenario for the disinflation process in the face of new shocks arising from the war between Russia and Ukraine, such as rising fuel prices.

Faced with this, the monetary authority showed caution and, despite the worsening inflationary environment in recent weeks, did not change its strategy.

In February, the collegiate had signaled the reduction in the magnitude of the adjustment of the basic interest rate after promoting increases of 1.5 percentage points in the Selic in the last three meetings.

“The Copom assesses that the moment requires serenity to assess the extent and duration of the current shocks. If these prove to be more persistent or greater than anticipated, the Committee will be ready to adjust the size of the monetary tightening cycle”, said the collegiate in the Wednesday’s statement.

For the BC, the interest cycle in the evaluated scenarios is sufficient for the convergence of inflation to a level around the target over the relevant horizon.

“The Committee emphasizes that it will persevere in its strategy until it consolidates not only the disinflation process but also the anchoring of expectations around its goals”, he pointed out.

In double digits, the interest rate is now at the highest level since April 2017, still in the government of Michel Temer (MDB), when interest rates were 12.25% per year.

The monetary tightening cycle is at an advanced stage in Brazil. This was the ninth consecutive increase in the Selic, with an accumulated increase of 9.75 percentage points. The increase in interest rates in the country is the largest among major economies around the world.

In March of last year, the Selic rate was at 2% per year, the lowest historical level, and five months later, it was already entering contractionary territory (which slows down economic activity and inflation).

This is also the biggest tightening cycle since the creation of the inflation targeting system in 1999, when the base rate rose from 25% to 45% per year.

The interest rate shock is a response by the BC to successive upward revisions of inflation expectations for the next year.

The Copom meets again on May 3 and 4, when the BC collegiate starts to look fully at the 2023 target in its decisions on interest rates, given the lag in the effects of monetary policy on the economy. For the next meeting, the BC foresees another adjustment of the same magnitude, that is, a new increase of 1 percentage point.

“The Copom emphasizes that the future steps of monetary policy may be adjusted to ensure the convergence of inflation to its targets, and will depend on the evolution of economic activity, the balance of risks and inflation projections and expectations for the relevant horizon of monetary policy. “, he reinforced.

Rafaela Vitória, chief economist at Banco Inter, says that Wednesday’s decision is in line with her projections, but that she would have liked to see Copom leaving its next move open.

“We are at the end of the cycle and fine adjustments are being made at this moment. The scenario is very volatile, with a lot of uncertainty. The ideal would have been for the Central Bank to have left its next step open. But it indicates another 1-point increase , it’s a little more ‘hawkish’ than we expected,” he said.

“Hawkish” is a jargon that comes from “hawk” (falcon, in English) and is used among economists to point out a contractionary posture of the autarchy, more aggressive and with a tendency to raise interest rates.

The expert also says that, despite having signaled what it will do at the next meeting, the Copom indicates that it may reconsider its decision and give an even greater increase, if necessary, giving great weight to rising inflation.

On Monday (14), the Focus survey showed that the median of inflation projected by economists for this year rose from 5.65% to 6.45%, further distancing itself from the ceiling of the target set by the CMN (National Monetary Council) .

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. If the projections are confirmed, the ceiling of the target will be breached for the second year in a row.

The projections released by the BC this Wednesday in the reference scenario are 7.1% for 2022 and 3.4% for 2023.

In February, the IPCA (Extended National Consumer Price Index) registered a high of 1.01%, a figure above market expectations, which had expected an increase of 0.95%. In the 12-month period, the inflation indicator reached 10.54%.

Faced with intense inflationary pressures, economists revised their forecasts for the Selic terminal rate. For 2022, they expect interest rates to close the year at 12.75%. In 2023, the expectation is 8.75% per year. The Copom considers the same numbers in both inflation projection scenarios disclosed.

According to the BC, a possible reversal, even if partial, of the increase in international commodity prices in local currency would produce an inflation trajectory below the reference scenario.

On the other hand, says the autarchy, fiscal policies that imply an additional boost in demand or worsen the future fiscal trajectory can negatively impact prices and the country’s risk premiums.

For the institution, despite the more positive performance of public accounts, uncertainty regarding the fiscal framework continues to maintain a high risk of de-anchoring inflation expectations.

Unlike the last statement, the collegiate said that it considers that this risk is being partially incorporated in the inflation expectations and asset prices used in its models.

Regarding Brazilian economic activity, the Copom highlighted that the release of GDP (Gross Domestic Product) for the fourth quarter of 2021 pointed to a higher-than-expected pace of activity, while consumer inflation continued to surprise negatively.

For Tatiana Nogueira, economist at XP Investimentos, the tone of the communiqué released by Copom drew attention, as well as the inclusion of an alternative scenario, giving it a greater probability of materializing.

“A different, extensive communiqué, with several changes and signs. The most striking of them is the very uncertain scenario and the difficult reading of it. It showed that”, he said.

In the second scenario prepared by the BC, the Copom’s inflation projections are situated at 6.3% for 2022 and 3.1% for 2023. For next year, this estimate would be below the center of the inflation target, set at 3 .25%.

The specialist also sees that the committee is already showing signs that the cycle of monetary tightening is coming to an end, with the Selic rate close to 12.75% or a little beyond.