BC signals for the Selic increase transparency and also noise, say economists

When announcing the hike in the basic interest rate (Selic) to 11.75% per year, last Wednesday (16), the Copom (Monetary Policy Committee) included an “alternative scenario” in the discussion and was emphatic about its next movement.

For the financial market, the Central Bank’s signals bring transparency, while generating noise in communication.

Mauricio Oreng, macroeconomic research superintendent at Santander, believes that the collegiate saw the need for an “alternative” scenario, insofar as the usual hypothesis for the price of oil would not be adequate for the reference scenario in the midst of the conflict between Ukraine and Russia and to new inflationary pressures.

In his opinion, the BC’s stance of shedding light on the different inflation scenarios in view of the uncertainties arising from the effects of the war is positive. “I think it is interesting from the point of view of BC transparency to disclose these simulations,” he said.

Alberto Ramos, director of the economic research group for Latin America at Goldman Sachs, says he believes that the excess of information can be harmful at certain times and sees a “latent tension” in the communication between a “hawkish” bias (harder) in the short term and a “dovish” (softer) bias in the long term.

“The BC is making a great effort to communicate in several dimensions and wanted to signal many things at the same time in an environment of great uncertainty. In this context, for me, less is more”, he said. “Sometimes too much transparency adds more noise.”

Some doubts may dissipate this Tuesday (22), when the BC will release the minutes of the last Copom meeting, with details of the decision on the direction of the basic interest rate and the cycle of monetary tightening in the relevant horizon, currently focused mainly on 2023. .

Oreng points out that this is an opportunity for the municipality to recalibrate the tone of its communication, influencing market expectations, as happened after the February meeting.

At the time, several analysts had the initial perception that the BC had not conveyed such a contractionary message in its decision. But this interpretation was reassessed after the release of the “minutes of messages”, with a harsher tone on the fiscal issue.

In this week’s report, specialists are awaiting more information about the outline of the “alternative scenario”, considered most likely by the BC, although supported by the trajectory of the oil price, an item marked by volatility due to geopolitical tensions.

Ramos also says that he would like to understand the value seen by the committee in issuing such a concrete signal for the adjustment of the next meeting, scheduled for the 3rd and 4th of May. In its communiqué, the Copom signaled a new increase in the Selic rate of the same magnitude, that is, 1 percentage point at the next meeting.

The attitude did not please the financial market, which expected the collegiate to leave its next moves open.

“The BC loses a margin of maneuver of grace and does not anchor expectations already telling what it will do next,” said Jorge Dib, macro-global manager at Frontier Capital. “I think he would gain more by being a little more open, anything he does differently now goes against his cue.”

Both inflation scenarios outlined by Copom in its communiqué assume that the terminal interest rate will be 12.75% in 2022. The market, in turn, projects a higher level and sees a high probability that the number indicated by the BC be reviewed.

In addition to the 1 percentage point increase in May, Santander estimates an increase of 0.5 point at the next meeting, in June, totaling 13.25% per year at the end of the monetary tightening cycle. Level that should be maintained until the first quarter of 2023, in the bank’s expectation. Frontier Capital also works with a terminal estimate of 13.25% or 13.5%.

In the Goldman Sachs projection, the Selic will reach 13% or 13.25%, depending on the magnitude of the increase in June, of 0.25% or 0.5%, influenced by the behavior of agricultural commodity price inflation and of the reaction of the Fed (Federal Reserve) in the North American economy.

The impact of the US central bank’s policy on the flight plan of the autarchy chaired by Roberto Campos Neto and on the Selic terminal rate is another topic that Ramos would like to see in the Copom minutes. However, he doesn’t believe he will have his answer.

Tony Volpon, chief strategist at WHG (Wealth High Governance) and former director of the BC, notes that the stance of the current board of the monetary authority of anticipating its steps to the following meetings does not have much “use” in the final part of the cycle of monetary tightening, when only fine adjustments are made.

“Making predictions and doing a few meetings later doing something different from that also ends up impacting the institution’s credibility,” he said.

This is also the opinion of the director of the economic research group for Latin America at Goldman Sachs. For Ramos, this strategy is only valid when there are guarantees that it will be carried out. “This degree of precision, even in countries with lower macroeconomic volatility than in Brazil, is not always very valuable. What we have seen in the last year is that this signal from the BC ends up being abandoned in a short space of time”, he said. .

With a year of consecutive increases, the monetary tightening cycle is at an advanced stage in Brazil. In March 2021, the Selic rate was at 2% per year, the lowest level ever. In the last week, it was the ninth increase in the basic interest rate, 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.