BC raises interest to 12.75% per year, highest rate since February 2017

As indicated at the previous meeting, the Central Bank’s Copom (Monetary Policy Committee) raised the basic interest rate (Selic) again by 1 percentage point, from 11.75% to 12.75% per year, this Wednesday (4).

The collegiate also indicated that the cycle of monetary tightening, which began in March of last year, is not yet over and it is appropriate that it “continues to advance significantly in even more contractionary territory”.

Regarding its next steps, the BC anticipated that it foresees an adjustment of lesser magnitude, that is, less than 1 percentage point in the June meeting.

“The Committee notes that the high uncertainty of the current situation, in addition to the advanced stage of the adjustment cycle and its impacts yet to be observed, demand additional caution in its performance,” it said in the decision’s statement.

At this Wednesday’s meeting, the BC collegiate repeated the magnitude of the increase promoted in March, when it moderated the pace of adjustments after a series of three interest rate hikes of 1.5 percentage points.

“The Committee understands that this decision reflects the uncertainty surrounding its scenarios and a balance of risks with an even greater variance than usual for prospective inflation, and is compatible with the convergence of inflation to the targets over the relevant horizon, which includes the 2023 calendar year,” he said.

It was the tenth consecutive increase in the Selic, which has accumulated a rise of 10.75% since March 2021. At the time, the interest rate was at 2% per year, its lowest historical value, in response to the crisis generated by the Covid-19 pandemic. 19.

With the monetary tightening cycle at an advanced stage in Brazil, the Selic has now reached the highest level since February 22, 2017, when the interest rate was at 13% per year, still in the government of Michel Temer (MDB).

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

This Wednesday’s Copom decision was in line with the unanimous projection of the financial market. A survey carried out by Bloomberg showed that all the analysts consulted expected an increase of 1 point in the Selic, in an attempt to curb inflation.

Since the last collegiate meeting in March, there has been a significant worsening in the global inflationary environment with the fuel and food price shocks resulting from the war in Ukraine, which has proved to be long-lasting.

Fears of new restrictive measures in China due to the advance of Covid-19 and the potential impact on global production chains also entered the radar, as well as the increase in interest rates by the Fed (Federal Reserve, the central bank of the United States) and the recent dollar, which returned to operate above R$ 5.

In March, the IPCA (Extended National Consumer Price Index) rose 1.62% and reached 11.30% in the 12-month period. Last week, the IBGE (Brazilian Institute of Geography and Statistics) reported that the IPCA-15 rose 1.73% in April –the biggest change for the month in 27 years– and reached 12.03%.

Internally, the BC also went through a turbulent period, with the mobilization of civil servants for salary readjustments and career restructuring. The first stage of the strike, which lasted from April 1 to 19, caused a series of delays in the monetary authority’s routine, especially in the dissemination of financial indicators, such as the Focus bulletin.

But the suspension of the strike for two weeks, before resuming this Tuesday (3), allowed the market to become aware of the evolution of expectations before the Copom meeting.

According to the Focus survey released on Monday (2), the median of economists’ projections for the IPCA rose from 7.65% to 7.89% in 2022. For 2023, the estimate also increased, from 4% to 4 .10%.

Market expectations put inflation further and further away from the objective pursued by the BC, which is 3.50% for this year and 3.25% for the next, with a tolerance margin of 1.5 percentage points for more or less. .

If the projections for 2022 are confirmed, it will be the second consecutive year of exceeding the target, which is established by the CMN (National Monetary Council). In 2021, the IPCA amounted to 10.06%.

The interest rate shock is a response by the BC to successive upward revisions of inflation expectations. Thus, economists also readjusted their forecasts for the Selic. For 2022, the expectation is that interest rates will close the year at 13.25%. In 2023, the market predicts 9.25% per year.

The Copom will meet again on June 14th and 15th to recalibrate the Selic. Given the lag in the effects of monetary policy on the economy, the BC collegiate will already fully look at the 2023 target in its decision on interest rates.