BC signals possibility of stronger interest rate hike to hold inflation

The disclosure of the biggest inflationary surprise in at least 12 months led the Central Bank to signal the possibility of a stronger monetary tightening this year to contain the rise in prices.

The Central Bank’s manifestation follows the movement of interest rates in the financial market and comes after the government’s own criticism of the conduct of monetary policy.

This Monday (11), the president of the BC, Roberto Campos Neto, said that inflation in Brazil is “very high” and that the IPCA (National Index of Broad Consumer Prices) in March was a “surprise” for the monetary authority.

Inflation has surprised public and private sector economists since the beginning of 2021. Including criticism of the delay in the reaction of central banks in Brazil and abroad.

In the last 12 releases, the IPCA was above market estimates on 8 occasions. The biggest deviation was from the index in March this year, which stood at 1.62%, compared to a projection of 1.35%, according to analysts consulted by Bloomberg – a difference of almost 0.30 percentage point. It was the highest inflation for the month since the beginning of the Real Plan.

At 11.30% in the 12-month period up to March, the IPCA is far from the inflation target pursued by the BC this year. The value set by the CMN (National Monetary Council) for 2022 is 3.5% — with a 1.5 percentage point tolerance up and down.​​

“We had a more recent rate that was a surprise. We were seeing a faster rate of passage of fuel to the pump and, therefore, this next rate would be a little higher and the next [abril] a little smaller. That was part of it, but there were other elements, such as clothing and food away from home, that came as a big surprise,” the BC president said on Monday.

According to Campos Neto, the institution “is analyzing the surprise [na inflação] to see if anything changes in the trend” for monetary policy. “We will look, analyze the factors that are generating these inflationary surprises and will communicate this at a time that is more appropriate”, he said.

On March 16, the Central Bank’s Copom (Economic Policy Committee) raised the Selic (basic rate) by 1 percentage point, from 10.75% to 11.75% per year. For the next meeting, in May, the collegiate signaled a new high of the same magnitude.

In March, the BC president had indicated that the next adjustment would be the last increase in interest rates, ending the cycle of monetary tightening with the Selic at 12.75% per year.

Since last week, however, market analysts have begun to consider that the Selic rate will not stop rising when it reaches the ceiling set by the BC.

Between the closing of the market last Thursday (7) and the end of the afternoon of this Monday, the DI interest contracts (Interbank Deposits) maturing in January 2023 went from 12.75% per year, the day before, to 13 .85%. For 2025, from 11.53% to 11.98%.

“I believe that the market may be putting into the account a possible chance that the Central Bank will go back on its decision to stop raising interest rates in June”, commented Marcelo Oliveira, founder of technology and financial education company Quantzed.

This assessment, however, is not unanimous.

Rafaela Vitória, chief economist at Banco Inter, says that the surprise in the IPCA in March does not characterize a situation of uncontrolled inflation and highlights some factors that will contribute to reducing pressure on prices in the coming months.

Among them, the anticipation of the end of the extra fee on the electricity bill and a new composition of dollar and oil price that would allow Petrobras to reduce the price of gasoline and diesel. Therefore, it maintains the projection of a last interest rate increase in May.

“When the shocks are very strong, we run the risk of having inflationary surprises. Especially when it comes from a rise in fuel prices. But we have not changed our position, because there are disinflationary surprises ahead,” he says.

Gustavo Cruz, a strategist at RB Investimentos, says that the BC may advance further in interest rates, but he does not see the institution fully stamping market rates. According to him, much of the inflation is imported and the BC cannot be blamed for missing the inflation target ceiling for the second year in a row.

“He [Campos Neto] already makes a retreat in its position, now accepting that it will probably be necessary to go a little beyond 12.75%. But I don’t think that this arm wrestling between BC and the market will totally lean towards the market, which will stay above 14%, which will continue to rise beyond June”, he says.

The RB strategist says that the inflationary surprise is largely explained by the way the market makes its projections, with a very strong component of the behavior in previous years.

“But since the pandemic, the behavior of inflation has been very different from the pre-pandemic. And when it seems that it is going to normalize, the conflict in Ukraine comes messing up a little more.”

Itaú expects the Copom to continue raising the Selic rate to 13.75% per year.

The rise in inflation took place practically all over the world. First, due to factors related to the pandemic, such as the interruption of production of components and finished products. Then, the bottlenecks caused by the war in Ukraine.

In Brazil, which has one of the highest inflation rates in the world, there was also the aggravating factor of the energy crisis and the devaluation of the exchange rate in 2021.

The Brazilian Central Bank was one of the first to start a cycle of interest rate hikes, in a movement with greater intensity than its peers. Even so, it has not escaped criticism.

Last week, Minister Paulo Guedes (Economy) stated that “central banks all over the world fell asleep at the wheel”, but that the Brazilian Central Bank “wake up first”.

The following day, a member of the economic team heard by the Sheet pointed out that the BC spent much of 2021 with negative real interest rates (nominal rate below the variation of inflation), which ended up stimulating the heating of the economy and paved the way for price acceleration.

Inflation has been seen within the government’s own political wing as a negative factor for President Jair Bolsonaro’s (PL) re-election campaign this year.